Can Canada embrace the economic moment?

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Stephen Poloz likens the moment currently facing the Canadian economy to the country’s founding, which came soon after the United States abandoned a reciprocal trade treaty in 1866.

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“After the Civil War, (the U.S.) decided they were walking away from that agreement,” the former Bank of Canada governor and current senior adviser at Osler, Hoskin & Harcourt LLP said. “The solution was actually, ‘We’re a bigger place than we used to be; we should just trade with each other.’ So they created Confederation. Imagine that: 150 years later, here we are.”

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Here we are, indeed. Canada is once again staring down an economic crisis brought on by its biggest trading partner. But if the tariff threats by U.S. President Donald Trump pose a profound risk, they have also galvanized Canadians to address longstanding economic vulnerabilities that were already becoming more noticeable over the past year.

Among them are a lack of housing, strains caused by high immigration levels and inflation, declining per capita gross domestic product (GDP) and lagging productivity.

“In a way, this is a moment because all those years of low investment, which really go back to 2015, are really starting to catch up with us,” Poloz said.

Don Drummond, an economist and professor at Queen’s University, went back even further in diagnosing the origins of the current crisis.

“I go back to the early 1960s when the (Organization for Economic Co-operation and Development) started; we had the fourth-highest level of productivity of that regional group,” Drummond said. “Now, we’re in the middle of the pack and seemingly losing at least one place every year.”

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Perhaps more relatable to the average citizen is that nearly 45 per cent of Canadians were living paycheque to paycheque prior to Trump’s tariff threats, according to a survey by Leger Marketing Inc. in November, and more than half believed Canada was in an economic recession.

Poloz said Canadians should never want to feel this vulnerable again, so it’s time to capitalize on this moment.

“How do we fix it? Well, you invest more political capital and investment capital in your resilience,” he said.

Christopher Sands, director of the Wilson Center’s Canada Institute think tank, also noted that the “silver lining” of the trade conflict with the U.S. is that Canada will now be forced to seriously consider reforming its economic policies, which include a restrictive regulatory environment and lagging business investment.

“The U.S. has maybe too great a tendency to tear everything up and start over,” he said. “Whereas Canada has a tendency to fall into complacency sometimes. And those two tendencies have come together a bit roughly.”

The Bank of Canada estimates investment in the Canadian economy could decline by 12 per cent and that exports will fall by 8.5 per cent if Trump’s tariffs last for a full year. Canadian growth would decline by three per cent over two years.

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“This will be a wake-up call: there are no safe countries anymore; we don’t know what’s around the corner these days,” Pedro Antunes, chief economist at the Conference Board of Canada, said. “Our best friend and neighbour for all these decades is threatening us with a tariff war; I think this will move supply chains.”

Canadian capital investment was already at a disadvantage. He estimates Canada’s investment as a share of GDP, excluding residential real estate, sits at 11 per cent compared to 15 per cent in the U.S.

As a result, now is the time for Canada to really focus on growth, innovation and research and development in key sectors, Robert Asselin, senior vice-president at the Business Council of Canada, said.

“One of the key issues with our lack of productivity, and it’s a longstanding one, can be attributed to essentially a lagging private investment in productive capital,” Antunes said.

Canadian politicians are all too aware that the top issue for voters is fixing the country’s ailing economy and addressing concerns about tariffs and affordability.

Last year, the federal government announced a raft of housing measures and began to scale back immigration levels, an acknowledgment that the economy was having a hard time absorbing newcomers.

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The coming federal election is also likely to be fought on the future of the economy.

Conservative Leader Pierre Poilievre’s Canada First plan promises a “Bring It Home Tax Cut” on income, housing, energy and investment. It also vows to repeal Bill C-69 — the Impact Assessment Act that oversees the assessment of a project’s environmental, health, social and economic effects — and to greenlight liquefied natural gas (LNG) and pipeline projects, among other measures.

Liberal leadership frontrunner Mark Carney has promised to reform government and the tax system, as well as bring on new incentives to build and invest. He also plans to diversify Canada’s export markets so that the country isn’t as vulnerable to actions taken by the U.S.

The premiers, meanwhile, have taken the removal of interprovincial trade barriers more seriously and renewed conversations about a west-to-east pipeline. TC Energy Corp. cancelled the proposed Energy East pipeline project in 2017 after both regulatory and environmental hurdles started piling up. But even Quebec, a longstanding opponent of such pipelines, has said it is now open to the idea.

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“The thing that strikes me the most is that some of the voices in Canada have talked about doing things that I think you should have done a long time ago,” Sands said. “In terms of thinking about trade diversification, thinking about supply chains, thinking about how Canada taxes its businesses.”

The big question, of course, is how the country can seize the moment and make the necessary changes to ensure its future prosperity.

“The hard part now is execution,” Asselin said. “It’s one thing to say you’re going to remove regulatory barriers, but it’s really hard to put in place.”

One area Canada where needs to be more competitive in is its tax system, which Drummond said is a challenge given the country’s fiscal situation.

“We should use the GST more and use that to buy down personal and corporate income taxes,” he said. “That would make our economy much more competitive; it would sharpen the incentives to work, save and invest. We need to embrace more radical ideas like that.”

Antunes and Asselin both said Canada would also do well to lean into industries where it’s competitive, such as energy and critical minerals, but that requires getting major projects done in a timely manner.

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“It does take, especially in the resources sector, a huge amount of time to get the approval process through all the layers of government done, and that’s another major challenge to businesses,” Antunes said.

Another area of opportunity is LNG, which Sands said has been a missed one for Canada, especially compared to the U.S., where exports have accelerated over the last decade.

“There were these long debates about stranded assets and the future of fossil fuels,” he said. “But you have to think about the world as it is more than the world that you want it to be, and I think leaders everywhere have that challenge.”

That’s why Canada also has to look to change things beyond its own borders. For example, Asselin said there needs to be a more deliberate economic strategy on trade, such as strengthening sectors where Canada could be an export powerhouse like agriculture and biotechnology.

“Biotech is also the future of everything,” he said. “We’re there on the R&D side, but we’re not there on the commercial aspect of it. I find this is something we could really focus on, as opposed to just giving money to foreign companies to come assemble cars here.”

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But perhaps the simplest way for Canadians to move their economy forward is to look to the past.

Poloz points out that one of the main responses to the U.S. abandoning its trade agreement with the provinces in the mid-19th century was for Canada to build the transcontinental Canadian Pacific Railway, thereby creating a stronger national union from west to east.

“Look at the investment we made in order to make that free-trade area work,” he said. “To keep the Western provinces interested in being part of it, they needed a transportation link, so they got up and built one just like that.”

Asselin also pointed to the country’s record of perseverance in the face of threats and challenges.

“Canada has been through wars, has been through extraordinary events in its history; I don’t see why in this moment we can’t do this,” he said. “Hopefully, we use the urgency, the emergency that has been created. It can’t just be business as usual in five months.”

• Email: jgowling@postmedia.com

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