Canadians are wondering what will happen to our country’s economy now that the incoming U.S. administration may put a 25% tariff on all exports we send to our largest trading partner.
How will this massive potential tax affect Canada?
According to economists, if implemented, it could potentially put hundreds of thousands of domestic jobs at risk while reducing the size of Canada’s economy by 2.6 per cent next year versus the status quo – putting our country into a full-blown recession by mid-2025 [1].
It’s no secret Canada's export-based economy is highly reliant on trade with the U.S. Domestic exports to our southern neighbour totalled $548 billion in 2023, accounting for 77% of Canada’s total merchandise exports [2]. The numbers get even higher when looking at energy; the U.S. accounts for 88% of Canadian energy exports [2] – meaning the sector and others like it will be hit even harder by tariffs.
While we leave it to our respective governments to figure out a way forward, the notion of tariffs with our largest trading partner brings an unlikely opportunity to the forefront – which is to open up a discussion about expanding our trade capabilities to other parts of the world and strengthening our economic future in the process.
Canada should seriously consider doing everything it can to diversify its export markets and establish stronger trade ties with emerging economies. That means developing more trade infrastructure - like pipelines - to our East and West coasts and ensuring our port systems are adequate for the job. This could help maximize the value of our natural resources while also strengthening our negotiating position with the U.S. [5].
A great example of the economic success that stems from getting more of our resources to tidewater is the Trans Mountain Pipeline Expansion (TMX). The pipeline’s additional capacity has boosted crude exports and added 0.3 percentage points to Canada’s real GDP growth in Q3 of 2024 [3]. It also has supported a narrowing of the WCS-WTI oil benchmark price differential, which, since recently peaking at $27 in late 2023, has narrowed to just $12 since October [3].
Canada used to lose more than $15 billion in revenues annually due to this oil discount [4], so narrowing this price differential is undoubtedly in the economic interests of every Canadian.
The proposed U.S. tariffs also remind us that Canada has missed massive opportunities like the Northern Gateway and Energy East pipelines, which would have given us more control over our economic destiny.
The now-defunct Energy East had a 1.1 million barrels per day (bpd) capacity [6], which would have exported Canadian oil off the Atlantic coast to buyers in Europe and elsewhere abroad.
Northern Gateway had approval from a large majority of First Nations along its route [13] but was rejected by the federal government in 2016. It would have transported more than half a million barrels of oil daily to the West Coast for export to energy-hungry buyers in Asia and other tidewater-accessible regions [7].
And while we've missed out on huge economy-boosting opportunities to develop our natural resources - more than $670 billion in cancelled or suspended resource projects since 2015 to be exact - today, Canadians are being met with a harsh reality: our economic performance compared to our peers has been dismal, and our standard of living is declining.
For example, since 2015 through to Q3 2024, Canada’s cumulative real gross domestic product (GDP) growth has been about 1.7 per cent — compare that to about 18.6 per cent growth in the U.S. over the same time period of about a decade [8]. Business investment in non-residential structures, equipment, machinery, and intellectual property are also down 8.2 per cent on a real per capita basis — versus real business investment per capita growth of 34.5 per cent in the U.S. [8].
Meanwhile, Canada’s projected economic growth rate in per capita GDP amongst 30 OECD countries between 2030 and 2060 is dead last, at just 0.78 per cent [9].
To add, earlier this year the Bank of Canada called our country’s lagging productivity an “emergency,” stating that while other countries have emerged from recent economic challenges like the pandemic, Canada’s productivity levels remain more or less unchanged from several years ago [10].
The list of red economic flags goes on.
If anything is made clear by Canada’s current plight, it is that we need to start building Canada up.
As a resource-rich nation, where the energy, forestry, mining, and agriculture sectors account for 21% of our economy [11], 3 million jobs [11], 50% of our exports [11], and 45% of our manufacturing output [12], that starts with supporting the development of natural resources – our economic bedrock.
So let’s bring Canadians together behind our natural resource sectors to help get our national economy back on track.
Let’s expand our trade capabilities and develop more of our resource reserves to export more of our food, wood, minerals, and oil and gas to the world, tapping into our full economic potential in the process.
And let's think strategically about where we will sell our resources while also working with our ally to the south, so we don't have to be as worried about these types of economic measures that could have a massive adverse impact on Canadian families in the future.
Don't get us wrong; the relationship we have with the U.S. is critically important on all levels and we should nurture and cherish that relationship to the best of our ability – in this particular case, by coming up with solutions to avoid the proposed tariffs. Also, if they want more of our oil, natural gas, food, lumber, and metals, we should oblige.
But that's not to say we shouldn't also be looking out for our own future. By diversifying where we sell our resources, Canada can secure a stronger, more resilient economy that benefits all Canadians, no matter what future challenges arise.
Our current economic woes combined with the threat of tariffs makes it clear once again that all the “no-pipeline” protests in Canada over the years were just plain bad for our country's economic fortunes. At the same time, they didn’t reduce global energy consumption one bit. Other countries have benefitted immensely from our lack of progress, while leaving Canada behind.
Let’s stop giving away these immense economy-boosting opportunities to develop our resources to other countries abroad, and focus on building up our own country for a change.
SOURCES:
1 - https://chamber.ca/news/trumps-25-tariff-threat-new-analysis-reveals-severe-economic-fallout-for-both-canada-and-the-u-s/
2 – https://thoughtleadership.rbc.com/canadian-industries-and-provinces-most-exposed-to-u-s-tariff-threat/
3 – https://x.com/rory_johnston/status/1868824504354648519?s=12&t=Act9QPUigWotLffoxqV2cA
4 – https://www.cbc.ca/news/canada/calgary/canadian-oil-price-discounts-impact-1.4901147
5 - https://theconversation.com/trumps-tariff-threat-is-a-sign-that-canada-should-be-diversifying-beyond-the-u-s-245134
6 – https://www.cer-rec.gc.ca/en/applications-hearings/view-applications-projects/archive/energy-east/
7 - https://www.thecanadianencyclopedia.ca/en/article/northern-gateway-pipeline-proposal
8 - https://nationalpost.com/opinion/matthew-lau-canadas-trudeau-induced-economic-coma
9 - https://www.fraserinstitute.org/studies/were-getting-poorer-gdp-per-capita-in-canada-and-oecd-2002-2060
10 - https://www.bankofcanada.ca/2024/03/time-to-break-the-glass-fixing-canadas-productivity-problem/
11 - https://chamber.ca/news/investing-in-natural-resources-sector-a-solution-to-canadas-productivity-problem-report-says/
12 - https://macdonaldlaurier.ca/canadas-resource-sector-protecting-the-golden-goose-philip-cross-jack-mintz-paper/
13 - https://www.fraserinstitute.org/commentary/northern-gateway-pipeline-and-purpose-duty-consult