Trump’s Tariff Tactics and Canada’s Retreat: A Turning Point in Global Trade Policy

Tariffs, Taxation and Tensions: How Trump’s Trade Strategy is Reshaping Global Economics in 2025. Canada, EU, Japan, India and China negotiate headwinds.

About the Author

KBS Sidhu is a retired Indian Administrative Service officer and former Special Chief Secretary, Government of Punjab. With over four decades of experience in governance and public policy, he holds a Master’s degree in Economics from the University of Manchester, UK. His work focuses on the intersection of global trade policy, international tariffs and taxation regimes, and geo-political strategy. He writes regularly on matters of economic diplomacy, institutional reform, and South Asia’s role in the evolving global order. (TL:DR— jump down to footnote¹)

Trump’s Tariff Tactics and Canada’s Capitulation

President Donald Trump's aggressive trade strategy reached a critical juncture on the last day of June 2025, with Canada capitulating on its controversial digital services tax (DST) targeting US tech giants while Japan faces mounting pressure over automotive tariffs. These developments highlight the unprecedented scale and intensity of Trump's second-term trade offensive, which has fundamentally altered the global economic landscape through a combination of universal baseline tariffs, sector-specific duties, and bilateral negotiations under tight deadlines.

Canada's Strategic Retreat on Digital Services Tax

Last-Minute Reversal Prevents Trade War Escalation

Canada made a dramatic U-turn qua its digital services tax policy just hours before implementation, abandoning the controversial 3% levy on tech firms such as Meta and Alphabet that was scheduled to take effect on Monday, June 30, 2025. The reversal came after President Trump abruptly terminated all trade discussions with Canada on Friday, denouncing the tax as "a direct and blatant attack on our Country".

The Canadian Digital Services Tax (DST) would have imposed a 3% charge on digital services revenue exceeding $20 million annually from Canadian users, levied retrospectively with effect from 2022. This retroactive application meant that American technology companies including Amazon, Meta, Alphabet's Google, and Apple would have faced an immediate bill of approximately $2.7 billion.

Political Context and Carney's Pragmatic Approach

The tax reversal represents a significant policy shift for Prime Minister Mark Carney, who assumed office in March 2025 following Justin Trudeau's resignation in January. Carney, the former Bank of Canada and Bank of England Governor, had campaigned on a platform of standing up to Trump but ultimately chose pragmatism over confrontation when faced with the prospect of a full-scale trade war.

"In our negotiations on a new economic and security relationship between Canada and the United States, Canada's new government will always be guided by the overall contribution of any possible agreement to the best interests of Canadian workers and businesses," Carney stated, announcing the resumption of negotiations toward the July 21, 2025 deadline.

Economic Stakes Drive Canadian Concession

Canada's decision to abandon the DST reflects the critical importance of its economic relationship with the United States. As the second-largest US trading partner after Mexico, Canada exported $412.7 billion worth of goods to the US in 2024 while importing $349.4 billion. The US accounts for approximately 75% of Canada's total goods exports, making the relationship essential for Canadian economic stability.

The withdrawal announcement immediately led to the resumption of trade talks, with Canadian Finance Minister François-Philippe Champagne speaking with US Trade Representative Jamieson Greer on Sunday evening. Both leaders agreed to target completion of a comprehensive trade agreement by July 21, 2025.

Trump's Tariff Arsenal Against Canada

Trump's pressure campaign against Canada involved multiple layers of existing tariffs that had already significantly impacted bilateral trade. These included 50% tariffs on steel and aluminium imports, 25% on auto imports, and a 10% baseline tariff on most countries, with Canada facing an additional 25% tariff ostensibly to combat fentanyl smuggling.

The threat of further escalation proved decisive in Canada's calculation. Trump had warned that he would announce new tariff rates on Canadian goods within seven days if the digital tax proceeded, potentially adding to the already substantial trade barriers.

Trump's Japan Strategy: Automotive Sector in the Crosshairs

Sustained Pressure on Japanese Auto Industry

While celebrating Canada's capitulation, Trump simultaneously maintained pressure on Japan, specifically targeting the automotive sector that forms a cornerstone of the Japanese economy. In a Fox News interview aired on Sunday, June 29, Trump expressed determination to maintain 25% tariffs on Japanese cars, arguing that automotive trade between the two nations is fundamentally "not fair".

"They won't take our cars, and yet we take millions and millions of their cars into the United States. It's not fair," Trump declared, adding that he could send Japan a letter stating, "You're going to pay a 25% tariff on your cars." The comments came amid ongoing negotiations between Japanese trade negotiator Ryosei Akazawa and US Commerce Secretary Howard Lutnick.

Economic Vulnerability and Market Impact

Japan's automotive sector represents a critical vulnerability in trade negotiations with the US. In 2024, Japan's trade surplus with the US reached ¥8.6 trillion ($59.3 billion), with approximately 82% of this gap attributable to Japan's surplus in cars and auto parts. The automotive industry alone accounted for roughly 28% of the ¥21 trillion ($145 billion) in goods that Japan exported to the United States.

The uncertainty surrounding automotive tariffs has already impacted Japanese markets, with auto-related stocks on the Topix declining amid Trump's continued threats. Major Japanese automakers including Toyota and Honda face the prospect of significant margin erosion if forced to absorb tariff costs or pass them on to American consumers.

Strategic Alternatives and Negotiating Leverage

Trump has suggested that Japan could reduce the bilateral trade deficit through increased purchases of American energy products, particularly oil, rather than seeking automotive tariff relief. "We have oil. They could take a lot of oil. They could take a lot of other things," Trump noted, indicating potential areas for compromise.

However, Japanese negotiators have emphasised their country's substantial economic contributions to the US, including over $60 billion in automotive industry investment and the creation of 2.3 million local jobs. This argument reflects Japan's strategy of highlighting the integrated nature of the bilateral economic relationship.

July 9 Deadline Intensifies Pressure

Japan faces a critical deadline of July 9, 2025, when the current 90-day pause on reciprocal tariffs expires. Without a negotiated agreement, Japan would face not only the existing 25% automotive tariffs but also an additional 24% reciprocal tariff rate, bringing the total potential tariff burden to nearly 50% on many Japanese goods.

Japanese negotiator Akazawa has described the automotive sector tariffs as "unacceptable" while acknowledging the approaching deadline as "a milestone in the talks". The compressed timeframe has forced intensive negotiations, with discussions continuing through both in-person meetings and phone calls.

The Broader Context of Trump's Trade Strategy

Universal Tariff Architecture

Trump's 2025 trade policy represents the most comprehensive tariff regime in over a century, with the average effective US tariff rate rising from 2.5% in 2024 to an estimated 27% by early May 2025, before settling at approximately 15.8% by mid-June following bilateral agreements. This dramatic transformation reflects Trump's use of emergency powers under the International Emergency Economic Powers Act (IEEPA) to impose sweeping trade measures.

The tariff structure includes multiple layers: a 10% baseline tariff on nearly all imports, sector-specific tariffs of 25% on automobiles and 50% on steel and aluminium, and country-specific "reciprocal" tariffs based on bilateral trade deficits. This architecture provides Trump with maximum leverage in bilateral negotiations while maintaining substantial revenue generation for the federal government.

Legal Challenges and Implementation Issues

The extensive use of emergency powers to impose tariffs has faced significant legal challenges, with the Court for International Trade ruling in May 2025 that tariffs imposed under the IEEPA are unlawful. However, an appeals court allowed the tariffs to remain in effect pending final resolution, with oral arguments scheduled for July 31, 2025.

Despite these legal uncertainties, the Trump administration has continued to pursue aggressive trade policies through multiple channels, including sector-specific measures that face fewer legal constraints. This approach reflects the central importance of tariffs to Trump's economic agenda, regardless of legal challenges.

International Response and Retaliation

The global response to Trump's tariff offensive has been mixed, with some countries choosing retaliation while others seek negotiated settlements. China initially engaged in a massive escalation, with US tariffs on Chinese goods reaching 145% and Chinese retaliatory tariffs hitting 125% before both sides agreed to a substantial reduction in May 2025.

European Union officials have condemned the tariffs as "a major blow to the world economy", while countries like Australia have refused to impose retaliatory measures to avoid a "downward spiral" of escalating trade barriers. This varied response reflects different strategic calculations about the costs and benefits of confronting US trade pressure.

Economic Impact and Market Disruption

The tariff campaign has generated significant economic disruption, contributing to downgraded GDP growth projections by the Federal Reserve, OECD, and World Bank. First-quarter 2025 US GDP fell 0.05% as firms and consumers stockpiled foreign goods before new tariffs took effect, causing imports to surge 41.3%.

However, global markets have shown resilience, with equity indices recovering from post-Liberation Day lows as investors adjusted to the new trade environment. The gradual phase-in of tariffs and various exemptions have provided some buffer against the most severe economic impacts.

Digital Services Tax: A Global Phenomenon Under Pressure

International DST Landscape

Canada's retreat on digital services taxation occurs within a broader global context where numerous countries have implemented or proposed similar measures targeting large technology companies. As of 2025, countries including France, Italy, Spain, Turkey, and the United Kingdom have implemented broad DSTs, while others like India have adopted more targeted approaches.

The proliferation of DSTs reflects widespread concern that traditional international tax systems inadequately capture the economic value generated by digital companies in market jurisdictions. These taxes typically target gross revenues rather than profits, applying rates between 1.5% and 7.5% to companies exceeding specified global and national revenue thresholds.

US Opposition and Tech Industry Impact

The United States has consistently opposed unilateral digital services taxes, viewing them as discriminatory measures primarily targeting American technology companies. The revenue thresholds and scope of most DSTs ensure that major US firms like Google, Amazon, Facebook, and Apple bear the primary burden while smaller competitors remain exempt.

For affected companies, DSTs create multiple layers of taxation and compliance challenges across different jurisdictions. The focus on gross revenues rather than profits particularly impacts companies with lower margins or those investing heavily in growth and expansion. The retroactive application of taxes like Canada's DST compounds these financial pressures by requiring immediate payments for past activities.

OECD Pillar One and Multilateral Solutions

The international community has sought to address digital taxation through the OECD's Pillar One initiative, which would create new rules for allocating taxing rights over large multinational companies. However, progress on Pillar One has been slow, with missed deadlines casting doubt on when a multilateral agreement might be implemented.

Many countries that have implemented DSTs, including France, Italy, Spain, and the United Kingdom, have committed to repealing their unilateral measures upon implementation of Pillar One. However, Trump's withdrawal of the US from OECD negotiations in January 2025 has further complicated prospects for a multilateral solution.

Revenue Generation and Policy Effectiveness

Despite their controversial nature, DSTs have generated substantial revenues for implementing countries. France's DST collected over €400 million in 2021, while the UK's measure generated approximately €360 million in its first year. These revenues, while representing only about 0.1% of total government receipts, provide meaningful resources for public finances.

Evidence from the UK suggests that DSTs can effectively target digital companies that have historically paid little corporate income tax. The cost-effectiveness appears favourable, with the UK spending €7.25 million in implementation costs to collect €416 million in revenues.

Strategic Implications and Future Outlook

Trump's Negotiating Playbook

The Canada-Japan developments illustrate key elements of Trump's trade negotiating strategy: the use of compressed deadlines, multiple pressure points, and the willingness to combine sector-specific and universal tariffs to maximise leverage. The success in forcing Canada's DST reversal demonstrates the effectiveness of this approach against economically vulnerable partners.

Trump's strategy also reflects a fundamental shift from multilateral to bilateral trade negotiations, allowing the US to exploit its economic size and market access advantages in one-on-one discussions. This approach has proven particularly effective against countries with high trade exposure to the US market.

Global Trade System Transformation

The events of late June 2025 represent a critical juncture in the transformation of the global trade system, with traditional multilateral approaches giving way to power-based bilateral negotiations. The willingness of countries like Canada to abandon controversial policies under US pressure suggests that Trump's tariff-based approach may achieve significant results.

However, the sustainability of this approach remains questionable, as evidenced by ongoing legal challenges and the economic costs of maintaining high tariff levels. The need for constant negotiation and the risk of retaliation create ongoing uncertainty for businesses and investors.

Technology Sector Vulnerabilities

The targeting of digital services taxes reveals the vulnerability of the global technology sector to trade policy disputes. With major tech companies generating substantial revenues across multiple jurisdictions, they face increasing exposure to unilateral taxation measures and retaliatory trade actions.

The Canada DST reversal provides temporary relief for US tech giants, but the broader trend toward digital taxation continues globally. Companies will need to navigate an increasingly complex landscape of national tax measures while hoping for eventual multilateral solutions.

July Deadlines and Continuing Negotiations

Critical Timeline Pressures

Multiple trade negotiations face critical deadlines in early July 2025, creating intense pressure for resolution of outstanding disputes. Beyond the July 9 deadline for Japan and other countries facing reciprocal tariffs, the broader July 21 target for completing various bilateral agreements adds urgency to ongoing discussions.

Treasury Secretary Scott Bessent has indicated that some negotiations might extend until Labour Day, suggesting flexibility in deadline enforcement for countries making genuine progress. However, the administration has also emphasised that "nothing gets accomplished in Washington well ahead of time," indicating that most agreements will likely be concluded at the last moment.

India and Other Critical Negotiations

India represents another major test case for Trump's trade strategy, with negotiations ongoing to avoid the July 9 reciprocal tariff deadline. India's trade delegation has extended its stay in Washington, indicating potential progress on an interim agreement that could address agricultural market access and industrial tariffs.

The India negotiations illustrate the complexity of achieving comprehensive trade agreements under compressed timelines, with significant disagreements remaining over agricultural products, genetically modified crops, and industrial goods. Success in these talks could provide a template for resolving other bilateral disputes.

Market Reactions and Economic Uncertainty

Financial markets continue to react nervously to trade policy developments, with sector-specific impacts varying based on negotiation progress. The Canada DST reversal led to positive market reactions, while continued uncertainty over Japanese automotive tariffs has depressed related stocks.

The broader economic impact of Trump's trade strategy remains contested, with some analysts predicting significant growth and inflation effects while others note the resilience shown by global markets. The ultimate assessment will depend on the resolution of pending negotiations and the long-term sustainability of the new trade architecture.

Conclusion: A New Era of Trade Diplomacy

The events surrounding Canada's digital services tax reversal and Trump's continued pressure on Japan represent defining moments in the evolution of 21st-century trade policy. Trump's willingness to use comprehensive tariff threats to force policy changes in allied countries marks a fundamental departure from traditional diplomatic approaches to trade disputes.

The success in forcing Canada's capitulation demonstrates the potential effectiveness of Trump's strategy when applied to economically vulnerable partners with high trade exposure to the US market. However, the approach also carries significant risks, including legal challenges, economic disruption, and potential damage to long-term alliance relationships.

As multiple deadlines approach in July 2025, the global trading system faces its greatest transformation since the post-World War II era. The outcomes of current negotiations will determine whether Trump's tariff-based approach becomes the new normal for international trade relations or represents a temporary disruption of established multilateral frameworks.

For businesses, investors, and policymakers worldwide, the Canada-Japan developments provide crucial insights into the dynamics of trade policy under the second Trump administration. The combination of universal tariffs, sector-specific measures, and bilateral pressure tactics has created a new reality that requires careful navigation and strategic adaptation.

The digital services tax issue specifically highlights the ongoing challenge of adapting international tax systems to the digital economy while managing great power competition. Canada's retreat may provide temporary relief for US tech companies, but the broader trend toward digital taxation continues globally, setting up future conflicts over tax policy and trade relations.

As the July deadlines approach, the international community faces critical decisions about how to respond to Trump's trade revolution. The choices made in the coming weeks will shape the global economic landscape for years to come, determining whether the world moves toward a more fragmented, bilateral system or finds ways to preserve multilateral cooperation in an era of intensified trade competition.

Trump’s Trade Blitz Forces Canada to Scrap Digital Tax, Puts Japan in Crosshairs

1. By Karan Bir Singh Sidhu

As Trump doubles down on protectionist policy in his second term, allies face stark choices: bend or brace for tariffs.

Washington/Ottawa/Tokyo – President Donald Trump’s second-term trade offensive has reached a boiling point. In a stunning turn of events on 30 June, Canada abruptly scrapped its impending 3% digital services tax (DST) on American tech giants—mere hours before implementation. The reversal, widely viewed as a capitulation under tariff pressure, comes amid intensifying negotiations with Japan over punitive auto tariffs and signals a transformative shift in global trade diplomacy.

Canada Blinks First

The proposed Canadian DST would have levied retroactive payments from 2022, targeting firms like Amazon, Meta, Apple, and Alphabet to the tune of $2.7 billion. But after Trump severed all trade dialogue and branded the measure a “blatant attack,” Prime Minister Mark Carney’s administration chose to de-escalate.

Carney—who took office in March after Justin Trudeau’s resignation—had promised a firmer stance against US pressure. But the potential economic fallout proved too great. With 75% of Canada’s exports tied to the US, the spectre of heightened tariffs on steel, aluminium, autos, and even fentanyl-related goods led to a hasty U-turn.

Finance Minister François-Philippe Champagne quickly reopened lines with US negotiators, targeting a full agreement by 21 July.

Japan Holds the Line—for Now

While Canada seeks to salvage its trade ties, Japan faces mounting pressure. Trump has maintained a 25% tariff on Japanese cars and hinted at raising the stakes further, citing a “fundamentally unfair” trade imbalance. The auto sector accounts for more than 80% of Japan’s $59 billion surplus with the US and nearly a third of Japan’s total US exports.

With a 9 July deadline looming—the expiration date of a temporary reciprocal tariff pause—Tokyo’s team, led by negotiator Ryosei Akazawa, is racing to strike a deal. Without one, Japanese goods could face tariffs nearing 50%.

Despite the threats, Japan has emphasised its $60 billion in US auto industry investment and 2.3 million jobs supported across America, hoping these facts might temper Trump’s hand. But in characteristic style, the US president suggested Tokyo should simply “buy more American oil.”

A New Trade Order

Trump’s tariff campaign has reshaped the global trade architecture. Since early 2025, he has invoked emergency powers to impose a universal 10% tariff, alongside 25–50% sector-specific levies. As of June, the average US import tariff had ballooned to 15.8%.

Legal challenges are pending, but for now, Trump’s framework remains intact—blending baseline, sectoral, and country-specific tariffs into a tool of economic coercion. Critics call it “tariff diplomacy”; supporters see a long-overdue correction to trade imbalances.

Meanwhile, the rest of the world is recalibrating. The EU has condemned the strategy, while China initially escalated before reaching a cooling agreement in May. Countries like Australia are staying neutral, wary of retaliation spirals.

The Digital Tax Debate Isn’t Over

Though Canada’s retreat offers a reprieve for US tech firms, the DST issue persists globally. France, the UK, Italy, and others have implemented similar taxes targeting digital revenue, not profits. These DSTs respond to perceived failures in the international tax regime, which many say allows Big Tech to underpay in markets they dominate.

With the US having exited OECD negotiations on a global digital tax deal in January, the multilateral path looks increasingly uncertain. Yet even as national DSTs raise compliance costs and risks of retaliation, they’ve proved financially lucrative—France alone collected €400 million in one year.

High Stakes, Tight Deadlines

As July unfolds, the pressure is mounting. Japan has just days to avert a tariff escalation. Canada faces a 21 July pact deadline. India, too, is engaged in late-stage talks to avoid reciprocal levies.

US Treasury Secretary Scott Bessent has hinted that some discussions may stretch to Labour Day. But the Trump team’s preferred tactic is brinkmanship—bringing negotiations to the edge, then extracting favourable terms.

Markets are responding in kind. Auto stocks in Japan have tumbled. US tech shares rallied after Canada’s backtrack. Economists remain divided on the long-term fallout: some warn of inflation and stagnation, others see resilience and rebalancing.

The Road Ahead

Trump’s playbook—compress deadlines, weaponise tariffs, push bilateralism—has yielded results, at least in the short term. Canada’s surrender on DST is a case in point. But questions remain over the sustainability of this high-pressure model, its legality, and the strain it places on alliances.

Digital taxation, too, is far from settled. As countries continue to explore unilateral levies and multilateral frameworks falter, tech giants may face an increasingly fragmented fiscal map.

What is clear is that the era of trade diplomacy as we knew it is over. Trump’s trade revolution has changed the rules—and every nation must now decide whether to fight, fold, or find a new path through the shifting economic terrain.