Donald Trump is threatening to make use of “economic force” to make Canada the 51st American state. Whereas his feedback could also be reckless, they’re partially because of Canada’s over-reliance on the USA market by way of commerce.
President-elect Donald Trump speaks throughout a information convention at Mar-a-Lago on Jan. 7, 2025, in Palm Seaside, Fla.
(AP Picture/Evan Vucci)
The advantages of worldwide commerce are undoubtedly optimistic. It’s well-established that when nations can produce a services or products extra cheaply than others, giving them what’s referred to as a “comparative advantage,” all different nations engaged will acquire from that commerce.
There are further positive factors that come from economies of scale as firms get entry to a lot bigger markets than can be found domestically. These embody enhancements in effectivity that come up via enhanced market competitors, leading to decrease prices of manufacturing and decreased costs for customers, and will increase within the number of items and providers out there.
Canada has outgrown a lot of its protectionist roots and is now a buying and selling nation. Regardless of having solely 0.5 per cent of the world’s inhabitants, Canada has 2.2 per cent of the entire of world commerce. Exports of products help one out of each six Canadian jobs.
Whereas the Canada-United States-Mexico Settlement (CUSMA) and its predecessor, the North American Free Commerce Settlement (NAFTA), garner many of the headlines, Canada has a complete of 15 free-trade agreements overlaying 61 per cent of world GDP, offering Canadian firms with entry to 1.5 billion customers worldwide.
And Canada is looking for much more free-trade agreements, given their demonstrated advantages.
Made-in-Canada answer?
However the important thing problem Canadian policymakers face is an over-reliance on the U.S. as Canada’s major market, with 75 per cent of all Canadian exports headed south.
One of many first classes in enterprise is to not put “all of your eggs in one basket.” Canada clearly must diversify its buying and selling companions, which is not any straightforward feat. However there’s a “made-in-Canada” answer to potential clouds on the worldwide commerce horizon.
The U.S. makes for a pure buying and selling accomplice, given its massive market and shut proximity to Canada. The 2 nations share comparable cultural norms and authorized methods, and the identical time zones and current infrastructure, together with ports, railways and bridges.
There’s additionally new infrastructure deliberate, together with the Gordie Howe Worldwide Bridge connecting Windsor and Detroit that may facilitate cross-border commerce when it opens later this 12 months.
A freighter makes its approach down the Detroit River previous persevering with building on the Canadian span of the Gordie Howe Worldwide Bridge in December 2023 between Detroit and Windsor. In July 2024, employees linked the 2 sides of the bridge.
(Daniel Mears/Detroit Information by way of AP)
However the over-reliance of Canadian exports to the U.S. exposes Canada to vital dangers that may end result from unilateral American commerce insurance policies.
Canada’s preferential entry to the U.S. market can not be assured, as proven by the protectionism that got here with Donald Trump’s first time period in workplace. In his guide The Retreat of Western Liberalism, Edward Luce, an editor with the Monetary Instances, argued there could be no “snap back,” that means a return to the established order earlier than the primary Trump presidency.
When Joe Biden turned U.S. president in 2020, American protectionism not solely remained, however intensified with aggressive new tariffs. With the return of Trump, who’s promising much more tariffs on Canada, it appears Luce was proper. There might be no snap again, and Canada can not take quick access to the U.S. market as a right.
Provincial commerce obstacles
One of many ironies in Canada’s quest for extra free-trade offers all over the world are interprovincial commerce limitations that exist inside Canada. A Canadian Senate report on Canada’s free-trade settlement with Europe notes that “European companies have easier access to some Canadian markets than Canadian companies from another province.”
The Canadian Federation of Impartial Enterprise (CFIB) has stated “it’s easier to do business in the U.S. than in another part of Canada.”
Bringing down inter-provincial commerce limitations might lead to numerous advantages. One research estimates that the existence of such limitations have resulted within the worth of client items and providers in Canada being greater on common by eight to fifteen per cent than they’d be within the absence of these limitations.
The research argues if interprovincial commerce limitations had been eliminated, there could be an enchancment in Canadian productiveness of between three and 7 per cent. In greenback phrases, that may add $50-$130 billion {dollars} to Canada’s economic system. The CFIB findings put the determine at $200 billion, or $5,100 per particular person.
There are additional advantages. Bringing down limitations to commerce throughout Canadian provinces would create circumstances that might allow Canadian firms to be extra aggressive internationally, and past the U.S. market specifically.
A manufacturing line on the Honda manufacturing plant in Alliston, Ont., in April 2023.
THE CANADIAN PRESS/Cole Burston
Enhanced aggressive forces that may circulation from decreased inter-provincial commerce limitations would enable Canadian companies to entry a a lot bigger share of the Canadian economic system, thus permitting the most efficient and progressive Canadian companies to develop.
These forces would lead to elevated enterprise funding, productiveness, spending on analysis and improvement and enhanced innovation. Extra progressive and productive firms in Canada would broaden, enhancing Canadian productiveness and prosperity. Incomes in Canada would rise. These adjustments would additionally make Canadian firms extra aggressive internationally.
Canada’s abysmal productiveness ranges
I’m presently conducting analysis with colleagues employed by the Authorities of Canada — Jianmin Tang of Innovation, Science and Financial Improvement Canada and Weimin Wang from Statistics Canada. We’re discovering that one of the simplest ways for Canadian firms to compete in markets additional away — which are totally different culturally, institutionally and in different methods — is to boost their very own productiveness.
Corporations with greater productiveness charges are in a position to extra efficiently penetrate markets in Latin America, Europe, Africa and the Center East — markets that may assist Canada lower its reliance on the U.S. market.
Carolyn Rogers, the Financial institution of Canada’s senior deputy governor, has bemoaned Canada’s productiveness charges.
THE CANADIAN PRESS/Sean Kilpatrick
However Canada has a significant productiveness downside. Financial productiveness is a measure of the speed at which the output of products and providers are produced per unit of enter (for instance, labour, capital and uncooked supplies). Merely put, Canada’s productiveness ranges are atrocious.
The senior deputy governor of the Financial institution of Canada described these challenges as an “emergency,” which is mostly not the form of language utilized by conservative central bankers.
What does poor productiveness efficiency imply for the typical Canadian? Incomes and buying energy undergo considerably.
There are lots of coverage adjustments which are wanted to reverse Canada’s poor productiveness efficiency. Dismantling inter-provincial commerce limitations is a superb place to start out, and would assist “trump” the rising obstacles to worldwide commerce.
