To say that it has been a tumultuous year in Canada would be an understatement. The country’s business model, which relies heavily on commerce with the United States, has been put under severe stress by the American administration. A reorientation lies ahead; the length and breadth of that process remains uncertain. There will be costs, but also opportunities.
For decades, the friendly tone of relations between the two North American neighbors led to substantial deepening of economic ties. The two nations share the world’s longest land border, which facilitates logistics between them. They have also shared nearly 40 years of open commerce, with the bilateral Canada-US Free Trade Agreement preceding Mexico’s inclusion in the North American Free Trade Agreement (NAFTA) by six years.
The updated United States-Mexico-Canada Agreement (USMCA) of 2018 sustained and extended the integration of the two economies. Strong growth in the United States provided ready demand for Canadian products. Last year, more than three-quarters of Canadian exports went straight south.
But what had been a source of strength became a major source of vulnerability when the Trump administration began threatening new tariffs on Canada as punishment for allegedly lax border enforcement. Nearly every week this year has featured threats, pauses, escalations and/or retaliations.
After short delays, the White House imposed 25% tariffs on steel and aluminum, important export sectors for Canada. As well, a 25% levy on autos (with a deduction for the U.S.-made value of vehicles’ content) and 25% levies on all goods not specifically subject to USMCA have been put into place. Canada has returned fire with a wide swath of retaliatory tariffs on U.S. goods including food, alcohol, furniture, paper, metals and computers.Canada’s exclusion from the most recent reciprocal and ad valorem tariff cycle took the focus off this front of the trade war, but commerce in North America is now substantially more expensive and cumbersome. Even the concessions around USMCA compliance are proving difficult to claim.
The damaged relationship with the U.S. has affected the political discourse in Canada. The nation’s cost-of-living challenges led to a political crisis late last year for the incumbent Liberal Party, spurring the resignation of former Prime Minister (PM) Justin Trudeau. Successor PM Mark Carney took office at an auspicious time. As continental tensions rose, so did support for the firmer line that the Liberals had taken against its neighbor. In hopes this shifting sentiment could extend his tenure and bolster his majority, Carney has called a snap election to be held on Monday, April 28.
The next Canadian leader will be challenged to chart a new course for growth and self-sufficiency. There are several avenues that might be pursued.
Looking inward will reveal a set of potential opportunities. Due to long-dated policies like inconsistent labeling and licensing requirements, Canadian provinces do not trade freely among each other. Most provinces conduct more trade with the U.S. than with their fellow states. These customs are due for reform. Canada has long had policies that favor domestic sources, even setting a minimum required time for Canadian musicians to be played on radio stations. Tensions with the U.S. have renewed a “Buy Canadian” campaign, and any policies to encourage inter-provincial trade will be well-received.
The vast landmass of Canada—second only to Russia in total area—is rich in natural resources. Its active oil sector was the root of the trade imbalance that drew the ire of the U.S.; over 80% of Canadian oil is exported. But petroleum is only part of the picture. The entire nation presents opportunities for mining, logging and other trade.
The warming climate will be an ongoing challenge for the global economy, but it may bring some silver linings for Canada. More of its land will become available to habitation, extraction and cultivation. Geopolitical attention is turning toward control of the Arctic Circle. Canada has a geographic advantage to claim sovereignty there, but lacks the materiel to maintain a presence.
Defending a claim on Arctic territory will require more investment in defense, where the nation has lagged. Among NATO members, Canada is persistently at the low end of military spending as a share of its total economy, with an annual budget amounting to only 3% of the defense outlay by its southern neighbor. Much like we are observing in Germany, a greater appetite for military spending would be a tailwind for employment and growth.
Even the contentious issue of immigration can work in Canada’s favor. Faced with immigrant flows that overwhelmed its built environments, policy was revised last year. The number of allowed permanent residents was cut by a quarter, and a new target was set for temporary residents not to exceed 5% of the population (after peaking over 7%). While eligibility may be tighter, the border is not closed. Over the long run, an economy’s potential is simply its number of working residents multiplied by their productive capacity. The newcomers will help Canada address the challenge of an aging population that will impair the prospects of many other developed markets.
The 49th parallel north which forms much of the U.S.-Canada boundary was a somewhat arbitrary choice made following the War of 1812. Rapid policy changes on the south side of this frontier are creating new-found opportunities and challenges to the north.
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Canada’s exclusion from the most recent reciprocal and ad valorem tariff cycle took the focus off this front of the trade war, but commerce in North America is now substantially more expensive and cumbersome. Even the concessions around USMCA compliance are proving difficult to claim.
The warming climate will be an ongoing challenge for the global economy, but it may bring some silver linings for Canada. More of its land will become available to habitation, extraction and cultivation. Geopolitical attention is turning toward control of the Arctic Circle. Canada has a geographic advantage to claim sovereignty there, but lacks the materiel to maintain a presence.