Why Canada Made a U-turn on the Digital Services Tax (DST)

A Domestic Decision with Global Diplomatic Ripples

What Was the DST and Why Did It Spark Controversy?

Canada's proposed Digital Services Tax (DST) was a 3% levy on the digital revenues earned from Canadian users by large multinational tech firms, such as Google, Meta, Apple, and Amazon. The policy was controversial for its retroactive application from 2022, which significantly increased the financial liability of US companies—amounting to nearly $2.7 billion.

President Donald Trump called the tax a “direct and blatant attack” on the US, prompting the termination of trade discussions with Canada. With diplomatic ties strained, the DST quickly evolved from a fiscal issue into a broader geopolitical flashpoint.

Canada’s Reversal: A Trade-Driven Strategy

Canada ultimately reversed its decision on the DST just hours before it was to take effect on July 1, 2025. This move was aimed at restarting stalled trade negotiations with the United States, especially with a critical July 21 deadline for a trade agreement approaching. With the US imposing high tariffs on Canadian exports, including steel, aluminum, and automobiles, scrapping the DST was a strategic move to reduce trade pressure.

Domestic Political Calculus

Domestically, the U-turn did not significantly hurt Prime Minister Mark Carney, even though he had campaigned on standing up to the US. The DST lacked widespread public support, as Canadians feared it would raise the costs of digital services like streaming and ride-hailing. Many observers believed the DST was always intended more as a bargaining chip than a serious revenue tool.

Digital Services Tax and the New Age of Global Diplomacy

Unilateral vs Multilateral Taxation – A Diplomatic Faultline

Countries such as Canada, France, India, and the UK introduced DSTs unilaterally, often in defiance of ongoing multilateral negotiations under the OECD/G20 framework for a unified global tax approach. These unilateral actions have deepened diplomatic friction, particularly between the US and its allies, undermining trust in global tax coordination efforts.

DST as a Tool of Digital Sovereignty

The DST is also a symbolic assertion of digital sovereignty. Governments argue that digital firms profit from local user bases without contributing to national tax systems. By imposing DST, states seek to reclaim control over their digital economies and challenge the dominance of Silicon Valley giants in global data and profit flows.

US Retaliation and Trade Diplomacy

The United States has treated DSTs as economic aggression. It has responded with Section 301 investigations, tariff threats, and trade freezes, as in the Canada case. The retroactive scope of Canada’s tax particularly inflamed tensions, showing how fiscal decisions can spiral into diplomatic crises.

Digital Economy as a New Arena of Global Power Politics

The DST debate reflects a larger struggle over who governs the digital world—sovereign states or multinational tech giants. Just as earlier eras saw power struggles over oil, tariffs, and trade routes, today’s conflict is about data flows, digital infrastructure, and algorithmic control. DSTs challenge the US-led digital order and signal the emergence of a multipolar digital economy.

DST as Diplomatic Leverage

Some countries use DSTs not primarily for revenue, but as strategic tools in broader negotiations. Canada’s reversal, for instance, unlocked trade talks with Washington. This dual-use function of DST—as both an economic and diplomatic instrument—makes it a unique policy lever in the age of digital diplomacy.

Implications for Global Norms and Policy

DSTs are reshaping the future of global digital taxation, antitrust regulation, and tech governance. As countries assert their tax sovereignty, they must also avoid antagonizing powerful allies like the US. The DST is thus not just a fiscal mechanism—it is a diplomatic marker in the contested governance of the digital age.

Big Tech as Non-State Actors: Reshaping Global Power in the 21st Century

In today’s digitized world, Big Tech corporations—Google, Meta, Amazon, Apple, and Microsoft—have evolved far beyond their economic functions. They have become non-state actors with political, social, and diplomatic power that often rivals that of nation-states. This transformation has had profound effects across governance, global diplomacy, economics, and ethics. The following analysis explores the major effects of Big Tech as non-state actors.

1. Erosion of State Sovereignty

Operating across jurisdictions, Big Tech companies often escape national regulation. Their borderless business models allow them to bypass local taxation regimes, labor laws, and data privacy rules.Facebook’s role in influencing electoral outcomes or Google’s data collection practices often evade effective domestic oversight.This weakens state authority in enforcing laws and protecting citizens, particularly in the digital domain.

2. Control Over Information and Public Discourse

Platforms like Meta (Facebook, Instagram), YouTube, and X (Twitter) are now the primary media spaces for billions of people worldwide. Their algorithm-driven ecosystems determine what content is seen or suppressed.Algorithms can amplify disinformation, polarize societies, or marginalize dissenting voices.The political narrative is no longer controlled by public institutions but by private algorithms—a shift with profound democratic implications.

3. Influence on Electoral Democracy

Big Tech enables micro-targeted political advertising, voter profiling, and algorithmic amplification of campaign content. The Cambridge Analytica scandal, which affected 87 million Facebook users, demonstrated how personal data can be weaponized to manipulate elections.These companies also have the power to de-platform politicians, effectively controlling their visibility and legitimacy.They can alter democratic outcomes without democratic accountability.

4. Undermining National Economic Policy

Through tax avoidance strategies, Big Tech firms shift profits to low-tax jurisdictions like Ireland, Bermuda, or Luxembourg, draining national treasuries. Apple’s effective tax rate has at times dropped below 1% in certain jurisdictions due to such practices. This undermines fiscal sovereignty, reducing governments’ ability to fund welfare, infrastructure, or social programs.

5. Monopolistic Behavior and Global Market Dominance

A handful of companies dominate search (Google), e-commerce (Amazon), social media (Meta), and mobile ecosystems (Apple). Their market concentration stifles local competition and innovation.Smaller, local firms cannot match their scale, pricing, or data advantage.This leads to economic dependency on a few dominant players and reduces technological self-reliance, especially in developing economies.

6. Private Control Over Digital Infrastructure

Tech giants now control the backbone of global internet services. Amazon Web Services, Google Cloud, and Microsoft Azure host everything from corporate databases to government platforms.Even critical state functions are increasingly reliant on these infrastructures.This creates a strategic vulnerability—governments become dependent on foreign private entities for essential digital infrastructure.

7. Displacement of Labor and Rise of the Platform Economy

The platform economy, driven by companies like Uber, Swiggy, Zomato, and Amazon Flex, has created new forms of employment—but at a cost. Gig workers often lack labor protections, benefits, and bargaining rights.Algorithms determine work availability, wages, and job security.This erodes traditional employment models, challenging the welfare state and social security frameworks.

8. Emergence of Corporate Diplomacy

CEOs of Big Tech firms increasingly engage in state-like diplomacy—meeting with heads of state, influencing legislation, and lobbying on a global scale.

Elon Musk and Mark Zuckerberg have participated in international regulatory discussions on AI, misinformation, and data governance.These firms behave like sovereign entities, reshaping global policy-making and diplomacy.

9. Surveillance Capitalism and Ethical Concerns

Coined by scholar Shoshana Zuboff, “Surveillance Capitalism” refers to how Big Tech firms harvest behavioral data to predict and influence user actions—monetizing attention and behavior.Consent is often buried in terms of service; user autonomy is compromised.This challenges the ethics of liberal democracy, raising concerns about manipulation, consent, and digital rights.

10. Geopolitical Leverage and Tech Nationalism

Big Tech firms are at the center of global geopolitical tensions. From the US–China dispute over TikTok and Huawei to debates around data localization and digital sovereignty, technology is now a core issue in foreign policy. These firms are both tools and players in international relations—subject to sanctions, restrictions, and policy battles. Tech becomes a battleground for asserting national power, and Big Tech becomes a strategic actor in statecraft.

Theoretical Reflections – What Political Science Scholars Reveal About DST and Non-State Actors

Susan Strane – The Retreat of the State

Susan Strange’s theory posits that power has shifted from nation-states to global markets and multinational corporations. DST reflects a state-led pushback against this trend, targeting transnational tech corporations that operate beyond traditional regulation. For Strange, DST is a tool for reclaiming state authority in domains like finance and knowledge, where Big Tech holds “structural power.”

Keohane & Nye – Complex Interdependence Theory

According to Robert Keohane and Joseph Nye, global politics is shaped by multiple interdependent actors, not just states. DST shows how states and tech firms are asymmetrically interdependent—tech companies rely on global access, while states rely on taxing digital activity. DST attempts to rebalance this power.

John Ruggie – Embedded Liberalism

Ruggie argued that post-war liberal markets were embedded within social and political controls. DST can be viewed as a re-embedding of digital capitalism—a move to reassert democratic oversight and redistributive justice in an economy increasingly dominated by tech monopolies and neoliberal market forces.

Immanuel Wallerstein – World Systems Theory

From a structuralist view, Wallerstein’s theory sees the global economy divided into core and periphery states. DSTs from countries like India and France represent a semi-peripheral resistance to value extraction by core-based tech giants. The US opposition to DSTs reflects hegemonic enforcement of core capitalist interests.

Michel Foucault – Governmentality

Foucault’s idea of governmentality suggests that modern governance extends beyond law to the management of behavior and knowledge. Tech firms govern through algorithms and platforms; DST is the state's countermeasure to discipline and regulate this algorithmic power—an assertion of state sovereignty over digital life.

Stephen Krasner – Sovereignty as Organized Hypocrisy

Krasner argued that sovereignty is often selectively invoked based on strategic interests. Canada scrapping the DST to enable trade talks illustrates a strategic retreat, while France’s refusal to back down reflects sovereign assertion. DST politics thus reveal how states toggle sovereignty claims based on diplomatic calculus.

DST as a New Diplomatic Frontier

The DST is not just a tax—it is a battleground of fiscal sovereignty, global digital governance, and international diplomacy. Canada’s U-turn exemplifies the delicate balancing act nations must perform: asserting their right to tax global digital profits while avoiding diplomatic fallout. As the digital economy expands, how countries manage this balance will shape the next chapter of global diplomacy and governance.

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