President Trump’s tariffs have jolted Canadians into rethinking our relationship with the United States.
When tariffs were proposed on Feb. 1, political leaders of all parties quickly promised to stand up for Canada through retaliatory tariffs and other moves. While some of them may have secretly been relieved to have attention taken off their previous political woes, it was nonetheless welcome to see our leaders step up to lead the surge in national consciousness sweeping the country. Especially since that had sometimes been in short supply over the last few years.
Some leaders went further, and talked about bold new moves to make Canada more independent and resilient. This included ideas like free trade between the provinces and doubling down on the fundamental economic reforms that are required to reverse Canada’s poor productivity performance, something economists have been whining about for years.
Some leaders on the centre-left have even recently talked about ideas previously unpalatable to their supporters, such as an East-West oil pipeline. Quebec and New Brunswick import almost 300,000 barrels per day of mostly U.S. crude, while Canadian oil produced in Western Canada faces U.S. tariffs. This idea, of course, is a revival of the Energy East pipeline concept which was cancelled in 2017.
Others have talked about exporting more Canadian oil and gas to Asia. The recently completed Trans Mountain Pipeline from Alberta to Vancouver increased export capacity by 590,000 barrels per day. Despite its massive cost overruns, Trans Mountain is now a very valuable national asset. The BC Liquefied Natural Gas projects underway will be too, with important benefits as well for proponents such as the Haisla First Nation and the Nisga’a First Nation as well as the communities nearby.
However, while the political dogs are barking, we have to admit the sled isn’t moving very fast yet.
The Canadian Free Trade Agreement between the provinces includes 131 pages of exceptions, and the feds and provinces have been working on the issue -- very slowly -- since 1995.
Recent announcements have been promising, but small. Last week, BC lifted some exceptions restricting non-BC investment in fisheries and limits on non-BC companies getting government contracts. Other provinces made similar announcements, and the feds chipped in with the end of exceptions that previously limited pan-Canadian access to government contracts.
Never mind that these exceptions should have been removed years ago. It is good our leaders are moving forward with more plans to kill more exemptions as 2025 progresses.
Unfortunately, while many of these reforms are worthwhile, their impact may not be as huge as many hope on our $3-trillion economy. There is only so much upside in allowing interprovincial free trade in booze, liberalizing nurse recognition, or allowing transport trucks to cross provincial borders without changing their tire pressures.
Meanwhile, we still seem to have a number of political taboos. You’ll notice most politicians remain in favour of what we euphemistically call “supply management” in dairy. Real reforms here would allow lower prices for Canadian families and bigger exports to Asia. New Zealand, a tiny country, exports 40 times more dairy than Canada does.
In another sign that the seriousness of our situation hasn’t quite sunk in yet, the candidates for prime minister in both major parties are talking about tax cuts.
If we end up in a real trade war and at the same time need to ramp up defense spending, I’m afraid to say your taxes are probably going to go up.
As an illustration, let’s look at what Canada did in World War Two. Wartime metaphors are usually overdone, and I’m not saying we are in a 1939 situation. But some of the moves of legendary wartime “Minister of Everything” C.D. Howe give you an idea about what a serious crisis program to boost Canada’s independence and resilience might look like today.
After the war began, taxes went up. Government borrowing went up. Canada made massive gifts of money and equipment to Britain and other allies. There was food rationing, limits on wage and price increases, and even controls on changing jobs in key sectors. To boost industrial output, C.D. Howe set up and pumped big bucks into over two dozen government corporations similar to the one that recently opened the Trans Mountain Pipeline.
So, if C.D. Howe came back today, what might he suggest?
It would probably include tax hikes and more government borrowing to pay for a wide swathe of projects to respond to a U.S. trade war and a worsening geopolitical situation.
This would include the equivalent of several more Trans Mountain pipelines to get more agricultural, mining, oil and gas resources to tidewater. Investors have been burned by provincial and federal regulatory processes on such projects before, and will want substantial risk-sharing by government. This means billions of dollars. Trans Mountain cost over $30 billion, although the government will hopefully get back a big chunk of that from pipeline tolls plus royalties and taxes on the oil sector.
You could pencil in a few more such projects for internal East-West electrical lines and oil pipelines. B.C. and Ontario, for example, are reliant on U.S. electricity at certain times.
C.D. Howe would probably recommend a streamlined socio-economic and environmental assessment process of strategic economic projects, as Germany did with windfarms and LNG import terminals after the Ukraine crisis hit natural gas markets.
Defence is another costly area where we will need to spend a lot more, especially if the United States really does pull back its support of Ukraine. This will raise the question of whether Canada will join European allies in backfilling withdrawn U.S. funding and equipment. If we decide not to leave Europe to deal with the situation by itself, billions would be needed.
Meanwhile, the Parliamentary Budget Officer has done some math on overall defence spending. If we meet our commitment to spend 2 per cent of our economy on defence, and do so by 2032-33, then defence spending will need to roughly double to over $80 billion.
Let’s hope none of this comes to pass. But the news from south of the border is not good. We should prepare ourselves to not only stand up for Canada rhetorically, but also with our wallets and our support for economic projects of national significance.
Keith Halliday is a Yukon economist and the winner of the 2022 Canadian Community Newspaper Award for Outstanding Columnist. His most recent book Moonshadows, a Yukon-noir thriller, is available in Yukon bookstores.
