Fun Fact: The United States-Mexico-Canada Agreement (USMCA) exempts roughly 80 percent of imports from Canada and close to 90 percent of imports from Mexico, reducing Section 122 tariff costs for consumers and businesses by nearly $7 billion for the 150-day period.

A New Tariff Threat

What’s Happening: Last Friday, President Trump threatened to impose a 100-percent tariff on any country that implements a digital services tax (DST) on U.S. companies, noting that such a tariff would supersede any U.S. trade deal. DST taxes target e-commerce, streaming services, or various other digital activities. As with tariffs, affected companies can be expected to pass costs along to consumers. The president specifically called out “numerous European countries” that are planning to impose a DST, potentially jeopardizing the U.S.-EU trade deal adopted last week by EU member states. In effect, the possible DST-retaliatory tariff replaces the previously threatened (but now unnecessary) 25-percent tariff on EU cars, which the president made in the event the EU did not pass the U.S.-EU trade deal by July 4. In either case, the Trump Administration lacks statutory authority to immediately impose a tariff without going through proper channels, such as a Section 301 or Section 232 investigation. Both executive tariff authorities take months to complete and as of now the administration has not launched an investigation specifically into DSTs.

Why It Matters: A tariff on EU member states that have implemented or plan to impose a DST could impact over $450 billion of imports, representing nearly a quarter of all U.S. imports and close to 75 percent of U.S. imports from the EU. More likely than not, the EU would be treated as an entire trading bloc, meaning the tariff would hit over $600 billion in commerce. Although much of the attention has been given to the EU, the threat appears to apply to the entire world, which greatly expands this tariff’s possible reach – to between $800 billion and $1.3 trillion in imports annually. The total value of impacted imports will depend entirely on whether such a tariff applies to countries that have imposed, scheduled, or proposed a DST, or all of the above. Presumably, the administration would include exemptions similar to the proposed Section 301 tariffs relating to forced labor. Tariff exemptions would significantly lower the value of impacted imports, to roughly $280-$450 billion according to the Shipment’s estimates.

It is unclear how such a tariff might be structured since DSTs differ wildly from country to country in terms of tax rates, targeted digital activities, and impacted companies. This also prompts the question as to whether the 100-percent rate – which is effectively a trade embargo – would be applied across the board or if countries would be broken up into separate categories. There is precedent for investigating DST’s harm to U.S. commerce, as there was a Section 301 investigation launched in 2020 targeting multiple countries. Deals were reached in 2021, however, that prevented any tariffs from taking shape. While DSTs extract hundreds of millions of dollars from primarily U.S.-based companies, a tariff of this magnitude would likely cost U.S. businesses and consumers far more in terms of direct tariff costs, retaliation, and lost economic activity.

Looking Ahead: The Shipment suspects that the likelihood of a 100-percent DST-retaliatory tariff is low, but it is possible that the Trump Administration revitalizes the old 2020 Section 301 investigations into DSTs if countries pursue digital service policies that harm U.S. interests. It is more likely that the administration relies on the proposed forced labor Section 301 tariffs as well as the impending Section 301 tariffs on excess capacity to achieve its goal of maintaining trade negotiating leverage and building a new tariff regime.

In Other News

USMCA Talks: This Wednesday, July 1, 2026, marked the start of trilateral review sessions for the USMCA agreement in which the Trump administration announced it will not renew the deal in its current form. The agreement will remain “in force pending resolution of these issues or until the Agreement’s termination.” President Trump negotiated the agreement during his first term but has expressed significant criticism of its structure and effectiveness. As a result of the United States declining to renew, the agreement now enters an annual review cycle until 2036. The United States Trade Representative stated the administration will continue to engage with Mexico and Canada to address the agreement’s shortcomings and ongoing trade deficits. Looking ahead, the United States will meet with Mexico the week of July 20 for a third round of negotiations, as talks are expected to be primarily bilateral moving forward.

America’s 250 Years of Trade: From the very founding of the United States, the ability for individuals to engage in trade – free from overly burdensome regulatory or tax policies – has been a hallmark of the American identity. Some of the crucial catalysts that led to the Revolutionary War were restrictive British policies that hindered U.S. trade, including the Navigation Acts, the Sugar Act, the Townshend Acts, and the infamous Tea Act which granted the British East India Company an effective monopoly on the tea trade in the Thirteen Colonies. While these are far from the only components leading to the desire for independence, these top-down British actions almost certainly contributed to the sentiment of “no taxation without representation” and the feeling that the government was infringing on the concepts of economic autonomy and self-determination. This helps explain why the founders specifically delegated taxation authority – including tariff policy – to the legislative branch rather than the executive.

It is true that in the early days of the nation, tariffs were the primary source of revenue for the federal government, and President Washington signed the Tariff Act of 1789 for the purpose of raising revenue. This was more a product of necessity – paying off accumulated debt from the revolution – as well as reflective of the era. Taxes on goods rather than incomes were more common at the time, given the challenge for a newly established government of administering a tax code despite very limited power over U.S. states. Over the course of the 1800s, the United States continued to maintain rather high tariff rates to raise revenue to pay for general government, conflicts such as the Civil War, as well as to protect up-and-coming industries during the Gilded Age. Congressman and then President McKinley has become the poster child of that period’s tariff policies, which some have wrongly identified as the major source of economic prosperity at the time. Rather, driving forces include a historic shift from an agricultural to an industrial economy coupled with technological advancements (telephone/electricity), western expansion, and the rise of a modern financial system, to name a few.

The early 1900s saw a slight ease in tariff rates, particularly after the 16th amendment was ratified in 1913, paving the way for the federal government to collect income taxes. Over time, income taxes – alongside other payroll taxes, the estate tax, and the corporate tax – became a far more important aspect of government finances, as they could generally raise more revenue more efficiently. Payroll taxes for instance are less economically distorting than a tariff, which has implications for exchange rates, foreign direct investment, input costs for businesses, the real wages of workers, the optimal allocation of both labor and capital, as well as foreign retaliation. Despite the growing prevalence of other taxation methods, tariffs were raised in the years after World War 1 and eventually the Smoot-Hawley Tariff was passed during the Great Depression. This sparked a trade war that worsened the state of the global economy and failed to lift the United States from the depths of economic contraction.

In the aftermath of World War 2, the United States emerged as the world’s dominant superpower and was able to lead in creation of global institutions such as the World Bank and the International Monetary Fund at the Bretton Woods Conference. These institutions helped generate a far more interconnected global economy with fewer barriers, and with formal processes to mitigate disputes. Greater international trade denominated in U.S. dollars contributed to its status as the world’s new reserve currency. This trade liberalization period saw the gradual reduction of U.S. tariffs, the introduction of free trade agreements, and an unprecedented rise in highly efficient supply chains, especially after the fall of the Soviet Union. On the whole, greater levels of trade have contributed substantially to U.S. economic growth and have created far more jobs than “destroyed,” with one study showing that over 40 million American jobs rely on international trade. While today’s sentiments surrounding trade have soured, the economic principles of free markets and ideals of the American Dream that transformed the United States from a group of colonies into a superpower remain the same.

U.S.-Uzbekistan Trade Deal: On June 25th, United States Trade Representative Jamieson Greer, met with Uzbekistan representatives, announcing an “early harvest of trade” commitments while accelerating negotiations towards a full trade deal. The “early harvest” signals continued progress since the announced $32 billion in bilateral commercial deals in 2025. Those agreements included an $8.5-billion Boeing deal, alongside purchases and investments across critical minerals, mining, energy, finance, and information technology. An early trade harvest would eliminate or reduce tariffs on a range of U.S. agricultural and industrial goods in exchange for favorable tariff action on Uzbekistan industrial and agricultural products – a decidedly positive development. The United States and Uzbekistan also agreed to strengthen bilateral investment cooperation between both nations and reaffirmed U.S. support for Uzbekistan’s WTO accession – hopefully to be finalized by the end of the year.

IEEPA Tariff Refunds Update: On June 29, Customs and Border Protection (CBP) launched Phase 2 of the International Emergency Economic Powers Act (IEEPA) tariff refund process via the Consolidated Administration and Processing of Entries (CAPE) portal. Phase 2 – which covers older, more complicated import entries – will run alongside Phase 1 and is expected to cover 2.8 million entries and close to $30 billion in tariff refunds. Phase 1 of the CAPE refund process began on April 20, marking the start of the largest trade-related refund in U.S. history. This allowed 330,000 importers – representing roughly $166 billion and 53 million import entries – a pathway to apply for tariff refunds after IEEPA was struck down by the Supreme Court. Tens of millions of import entries have passed the validation process so far and over $71 billion has been sent to U.S. importers. As of June 29, it is estimated that over $104 billion in IEEPA tariff refunds have been accepted for processing and distribution, stemming entirely from Phase 1 of CAPE. Together, the two phases are projected to cover roughly $130 billion of the total $166 billion in potential IEEPA refunds.