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With help from Brian Faler and Doug Palmer

QUICK FIX

Canada is moving forward with a digital service tax amid threats of retaliation from the Biden administration, escalating a dispute that could undermine trading relations between the North American partners.

China and Russia remained unified at the Asia-Pacific Economic Cooperation food security meeting, bucking Western ambitions that Beijing could help revive a critical grain deal.

American sheep producers are calling on U.S. Trade Representative Katherine Tai to request an investigation that could lead to new trade restrictions on Australia and New Zealand.

Happy Monday, Aug. 7. Welcome to Morning Trade. This week marks the one-year anniversary of when the Biden administration signed the CHIPS and Science Act into law. Sounds like as good a reason as any to ask your boss for some time off. Let us know how that goes or send us your trade news at: [email protected], [email protected] and [email protected]. You can also follow us on X: @_arihawkins, @gavinbade and @tradereporter.

Driving the day

NORTH AMERICAN TENSIONS TIGHTEN: The Canadian government is pushing ahead with its planned digital service tax on American tech giants, a move Biden administration officials warn could mount a trade fight between the long-standing allies.

Ottawa published a 138-page document outlining how that plan would work on Friday. A 3 percent revenue tax on large technology companies like Meta, including corporations with online marketplaces like Walmart and Amazon, “will come into force on a day to be fixed by order of the governor in council, but not earlier than January 1, 2024.”

Backlash mounts: USTR filed comments with the Canadian government in February 2022, and criticized the tax for singling out American firms. It also warned that if Ottawa went through with the measure the U.S. would “examine all options, including under our trade agreements and domestic statutes.”

Ready to retaliate: U.S. Ambassador to Canada David Cohen said in an interview with Canada’s National Post published last month that USTR Katherine Tai has made it clear that “if Canada decides to proceed alone, you leave the United States with no choice but to take retaliatory measures in the trade context, potentially in the digital trade context, in order to respond to that.”

Officials, including Treasury Secretary Janet Yellen, are now furiously lobbying their Canadian counterparts to back off, so far without much progress. Frustration is also mounting in Congress.

“The Canadian government has repeatedly been warned,” said Senate Finance Chair Ron Wyden (D-Ore.), per Brian Faler.

“If Canada continues to move forward with these discriminatory policies, the Biden administration must examine all options under USMCA [U.S.-Mexico-Canada Agreement] and other domestic statutes to address this matter, and they will have my strong support.”

Industry response: The National Foreign Trade Council responded on Friday and said it is “acutely disappointed with Canada’s decision today to move forward with their plans.” The statement said the act is “clearly discriminatory” toward U.S. companies.

Quick context: More than 140 countries are yet to implement a 2021 deal that would restructure rules on how governments tax multinational companies.

In July, more than 130 countries party to the deal, including the world’s largest economies, agreed to hold back DSTs until 2025 to give negotiations more time. But Canada says it has already put off its digital services tax for two years, that it has waited long enough and that it will begin imposing the tax in January “if the treaty to implement Pillar One has not come into force,” which is unlikely.

Ottawa to remain firm: “Canada’s being asked, again — having agreed to a two-year standstill — to agree to further standstills with no fixed date” on when the process will be completed, Deputy Prime Minister Chrystia Freeland said last month in an interview with POLITICO’s editor-in-chief Matthew Kaminski. “For us, that’s clearly a disadvantageous position.”

APEC CONSENSUS WEAKENED: Russia’s decision to pull out of the Black Sea grain deal was among the items that blocked the 21 Pacific Rim economies from issuing a joint statement at a regional food security meeting, per Doug Palmer.

Instead, the U.S. host, Agriculture Secretary Tom Vilsack, issued a “chair’s statement” summarizing the main points of agreement and disagreement at the meeting on Friday, which took place under the annual forum.

“Nearly all APEC ministers expressed deep regret for the decision of the Russian Federation to unilaterally withdraw from the Black Sea Grain Initiative (BSGI) and call on the Russian Federation to reverse its decision, return to negotiations, and extend and fully implement the initiative immediately, stressing the importance of allowing grains to continue to reach those most in need,” Vilsack said.

A USDA official, speaking on condition of anonymity, confirmed that both Russia and China blocked a joint statement that included the critical language on the Black Sea Grain Initiative.

The statement comes as officials from 21 member countries gather in Seattle for meetings on disaster management, finance, food security, health, energy and small and medium-sized enterprises, ahead of the leaders summit in November in San Francisco.

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Divisions deepen: The APEC bloc includes Russia and China, as well as the U.S., Japan, South Korea, Mexico, Canada and other countries in Asia and the Americas.

The Ukraine war has made it difficult for the group to issue joint statements from its regular meetings, despite hopes from Kyiv and the U.S. that China would be able to nudge Moscow into reconsidering its position since Beijing benefits from the deal.

Tensions rise: Moscow started attacking Ukrainian ports on the Black Sea coast after its exit from the deal, destroying tens of thousands of tons of Ukrainian grain with implications for global energy and food security. Veronika Melkozerova has more.

THIS AFTERNOON — ACTIVISTS GATHER: Rep. Pramila Jayapal (D-Wash.) will take part in a conversation at the University of Washington to discuss current digital trade proposals and their implications on worker rights, monopolies, bias in AI and consumer privacy.

The Town Hall tees up a contrast with APEC, and provides a “public platform to labor, civil rights, consumer and other constituencies that have views on ‘digital trade’ that differ greatly from those of Big Tech lobbyists,” according to a press release.

Progressive activists delivered a petition at an earlier APEC meeting urging the Biden administration for greater transparency around the ongoing Indo-Pacific Economic Framework and to limit the influence of American technology giants in trade agreements broadly.

NEW LAMB CASE TARGETS AUSTRALIA, NEW ZEALAND: President Joe Biden could restrict lamb imports from two countries — Australia and New Zealand — that are participating in talks on his signature trade initiative, IPEF, if American sheep producers get their way.

Industry representatives filed a petition late last week asking Tai to request the U.S. International Trade Commission launch an investigation under Section 201 of the 1974 Trade Act, which allows the president to impose temporary import restrictions to give domestic producers time to become more competitive.

Former President Donald Trump used the statute to impose import curbs on solar products and washing machines. A USTR spokesperson confirmed Friday the agency has received the petition and is reviewing it. Australia is the biggest source of imported lamb coming into the United States, followed by New Zealand. But lamb imports from Canada, Mexico and other suppliers could also be hit by any import restrictions imposed by Biden.

The sheep committee of R-CALF, which is predominantly a cattle industry group, is behind the push for a probe. It could have directly asked the ITC to launch an investigation, but hopes to persuade Tai or one of the congressional trade committees to do that on their behalf.

“The sheep industry has just been devastated [by imports] and it is extremely costly for the industry to file a petition on its own,” R-CALF CEO Bill Bullard told Morning Trade. “But this issue is so serious that we believe the government officials should step up to the plate and address this matter as quickly as possible.”

Australia, Canada and Mexico all have free trade agreements with the United States. Bullard said he did not believe that would prevent the Biden administration from restricting imports from those countries under the 201 statute.

BIDDING GOODBYE: Outgoing World Trade Organization Deputy Director-General Anabel González said the multilateral trading system needs to be updated to unlock new sources of trade growth, harness the potential of trade to resolve global challenges and mend strained global relations, in a farewell message published last week.

International Overnight

— Poland halted shipping oil through part of the Druzhba pipeline, which carries fuel from Russia to Europe after a leak was detected, our Antonia Zimmermann reports.

— Biden is expected to issue his long-awaited executive order this week to screen outbound investments in sensitive technologies to China, per Reuters.

— China lifted a three-year-old tariff on Australian barley in a sign of improving bilateral relations, per CNBC.

— Autocratic regimes are benefiting from the record amounts of badly-needed cash that migrants are sending to their communities abroad, The Wall Street Journal reports.

— India said Friday it would push the imposition of a licensing requirement on electronic devices by three months in a move that could be aimed at addressing a trade imbalance with China, Reuters reports.

THAT’S ALL FOR MORNING TRADE! See you again soon! In the meantime, drop the team a line: [email protected], [email protected] and [email protected]. Follow us @POLITICOPro and @Morning_Trade.