Not surprisingly, the prophecy of gloom and doom surrounding potential tariffs and the large negative economic impact that Canada would face has dominated economic and political discussions. The common response is to retaliate, drawing upon the playbook that was used during the previous Trump administration.
These tariffs, however, defy economic logic and are beggar-thy-neighbour policies that will only result in harm in both Canada and the United States. Even if there is a political imperative to put them in place, there is still much that Canada can and, indeed, must do to create the economic conditions to drive Canadian prosperity. Here is a five-point plan:
First, lower barriers to internal trade. It is very ironic that while there is almost unanimous agreement by federal and provincial leaders that tariffs are the appropriate response to US threats, provinces continue to protect their own turf from each other with barriers to trade that go back decades, if not centuries. Addressing these barriers could lead to substantial gains. Indeed, this trade could mitigate, to some extent, the impact of US tariffs. We saw this during the financial crisis when external trade plummeted more than 20 percent as US demand weakened substantially while internal trade held up relatively well. Unfortunately, while internal trade held up, these barriers have meant that it has also barely grown since that time, representing an avoidable economic loss to all Canadians. The premiers have recently called for action, but we have heard that story before. Maybe this time will be different.
Second, boost internal demand via government procurement and stimulative macro policies. It is a deplorable situation that Canadian firms often find it easier to sell to foreign governments rather than those in Canada. This situation particularly disadvantages small firms that are the source of most employment growth and that drive innovation.
At the same time, use macroeconomic policy to support demand. Macro support will be required since there is still a cost-of-living crisis for many, and tariffs (whether imposed by the United States or Canada) will hurt lower-income groups more than others both through job losses and higher living costs. Despite the furore over deficits, Canada has the fiscal space to absorb some of the shock. There is also monetary policy space, though how much will depend on the specific tariffs and the balance between the demand and supply-side shock that will emanate from them. In the face of a large demand shock, the combination of fiscal and monetary policy “rowing in the same direction” is particularly powerful.
Third, focus on a revamp of our economic frameworks. Substantial progress has been made to improve conditions for competition, but it remains a work in progress. Little progress has been made on a framework for data governance that is required to unleash the value of data.
Fourth, use the probable re-opening of the Canada-United States-Mexico Agreement (CUSMA) to assert our economic interests. Too much focus on tariffs will allow vested US interests, particularly those in the tech sector, to further enhance conditions that support them to the detriment of Canadian firms. Provisions within CUSMA over competition, digital trade and intellectual property (IP) need to be considered together.
At the same time, Canada must continue to pursue other digital agreements, including the Digital Economy Partnership Agreement, and to influence standard setting, which allows Canadian values and IP to be embedded within standards that will help to create freedom to operate for Canadian firms.
And fifth, underlying each of these points is the need for improved coherence in policy making. This issue has been evident with the so-called team Canada approach to tariffs. It has been evident with immigration, housing and health-care policies.
And, unfortunately, less evident to our policy makers, but even more important, is that this coherence is an imperative in a data-driven economy. Issues related to the uses of personal data spill over into virtually all areas of policy, including news and journalism, privacy, data governance, public safety, competition and consumer protection, open banking, public safety, cyber, IP — the list goes on and on.
Gaps in policy in these interconnected areas create harm for the individual and for communities, and can break down trust in our institutions.
The benefit of all these changes would be to create a more dynamic, resilient and competitive economy with firms better able to seek new markets, scale and weather economic storms. Coherent strategic policy will help Canada to not only weather this storm but also better prepare for future ones.
