Nation Building and Northern Ontario

 

Yesterday’s Throne Speech emphasized that the world has shifted and is more uncertain but that it is also a time of opportunity to reforge Canada’s economic and political relationships and embark on economic nation building that could be the largest transformation of the Canadian economy since WWII.  There was a commitment to major national infrastructure projects as well a movement to remove federal barriers to internal trade to enhance the Canadian economic union.  However, the details of what is going to be done remain a work in progress and that suggests that there are still opportunities to put forth new ideas.  If Canada is going to embark on a period of building a larger internal economy and putting in place national infrastructure projects, attention needs to be paid to the transportation links that knit the economy together - in particular, the road network.

The highway and road transport network in Canada has been key in facilitating our trade and commerce particularly with respect to the United States.  Truck transportation accounts for nearly half of the Canadian exports shipped to the United States and nearly 70 percent of the goods imported from the United States.  The east west dimension of Canadian internal trade should also not be underestimated when examining the role of road transport in facilitating the Canadian Economic Union.  For example, it has been noted that “$528 billions of goods and services moved across provincial and territorial borders in 2022—equal to 18.8% of Canada's gross domestic product. Furthermore, one-third of Canadian businesses participated in internal trade by buying or selling goods across provincial and territorial borders in 2023.”

If there is to be more east-west internal trade within Canada as trade barriers are removed, it stands to reason that much of this commerce will flow through the Highway 11-17 corridors in northern Ontario.  However, the roads here are already severely stressed by the post pandemic increases in transport trucks and associated accidents.  According to the OPP, 60 percent of fatal crashes in Northwestern Ontario alone (21 fatalities) in 2024 involved transport trucks.  This is not surprising given the increase in truck volume as well as the two-lane nature of much of the highway system in northern Ontario. While there are more passing lanes in place than 20 years ago, in many respects little has changed in what is a vital zone of national transit.  As noted in a much earlier pontification on this topic:

“Canada is the largest developed country in the world without a system of fully grade-separated roadways that allow uninterrupted traffic flow between its major urban centres. The key roadblocks include the two-lane stretches from the Manitoba border to Sudbury and much of the route between the Alberta border and Kamloops. Most importantly, the Trans- Canada is still a two-lane stretch through the vital zone of transit through northwestern Ontario connecting the East with the West from the Manitoba border to Sudbury, leaving the nation's east-west flow of personal and commercial traffic subject to the whims of an errant moose. The slow travel times and disruptions make cutting through the United States an attractive option for east-west travellers, despite the absence of an Interstate route along the border, but U.S. border crossing formalities have also made this more difficult and time-consuming.”

If U.S. border issues were a concern two decades ago, they are even more significant now.  In improving the east-west highway link through northern Ontario, there are definite challenges of cost rooted in both distance and geography but if the Europeans can tunnel through mountains to build their autobahns and autostradas, then surely, we can deal with rocks, trees and muskeg.  There are two key highways – Highway 11 which can be termed the northern route and Highway 17 which can be term the southern route though both come together as 11-17 from Nipigon to Shabaqua.  While a portion of the stretch between Nipigon and Thunder Bay is being four-laned, after nearly 20 years the four-lane project here is still not complete.  Moreover, it remains that there is a bottleneck at Nipigon given the national highway system comes to one choke point at the Nipigon Bridge which is subject to disruptions.

What should a national project to improve the Trans-Canada through northern Ontario look like?  Here is my suggestion. Highway 11 from North Bay to Nipigon should be four-laned. The 400 from Barrie to Sudbury is nearly completely four-laned.  After Sudbury, constructing four lanes on highway 17 is more problematic for several reasons but Highway 17 from Sudbury through to Sault Ste. Marie to Nipigon should be subject to 2+1 upgrading – essentially a three-lane highway with a centre passing lane that alternates every two to five kilometers. 

While the Ontario government is planning to do this on Highway 11 north of North Bay, the entire stretch of Highway 17 from Sudbury to Nipigon should be done this way.  Highway 11-17 from Nipigon to Shabaqua should be four-laned.  Highway 17 from Shabaqua to the Manitoba border should be four-laned.  And, if more resilience is desired given the potential bottleneck at the Nipigon bridge, thought should be given to an additional crossing over the Nipigon River between MacDiarmid and Nipigon that would consist of a 2+1 highway to Upsala.  There is also the issue of Highway 11 past Shabaqua that ends in a U.S. border crossing leaving only one major highway crossing between Manitoba and Ontario that may need to also be explored. However, a bottleneck on flat land is in somewhat of a different league than one over a water crossing.

Of course, the element of cost here is paramount.  Estimates of the cost per kilometer for 2016 for northern Ontario alone suggest a range between $350,000 and $550,000 per kilometre. One suspects that in the wake of the pandemic like everything else, costs have grown substantially. However, we have both a Prime Minister who wants to nation build as well as strengthen the Canadian economic union and facilitate more internal trade as well as an Ontario Premier who wants to invest in nation building projects that includes a tunnel under the 401 and a deep water port on James Bay – not exactly cheap projects.  The transport infrastructure for a stronger east-west commercial union is necessary and yet has been strangely missing from both the national and provincial discourse.  

Nevertheless, it is somewhat refreshing to have a government that seems ready to embark on aspects of  sovereign reconstruction (after a decade of what I suppose can then be termed sovereign deconstruction).   However, when to comes to sovereignty and enhancing our national economic space, words are not enough.   There will need to be action and that action will require investing in transportation infrastructure that enhances Canada’s economic space as an economic union.  Improved highway links through Northern Ontario are key to doing this and a start would be our northern Ontario federal and provincial MPs and MPPs recognizing this and making the case. 

 

 

 

Canada's Effective Tariff Rate: 1870 to 2024

 

I had a recent piece in The Hub dealing with President Trump’s current tariff policies that included a chart on the average effective tariff rate on US imports from 1870 to the present.  In its wake, Almos Tassonyi contacted me and asked if I was planning to do something similar for Canada.  Honestly, it had not occurred to me but thanks to Almos for the suggestion and this post presents data on Canada’s effective tariff rate on imports.  It is just in time for Prime Minister Carney’s trip to Washington and he might like to point out that historically, Canada has had lower effective tariff rates on imports than the United States.  But then, that should not be surprising given that we have always been a small open economy with trade as an important contributor to our economy.

The accompanying chart plots both the US average effective tariff rate taken from the previous article on The Hub alongside the Canadian average effective tariff rate. The average effective tariff is the ratio of tariff revenues to the total value of all imports rather than tariff revenues to the value of dutiable goods imported. Since 1870, the average tariff rates on dutiable imports have been higher than the average effective rate.  And of course, the actual rates imposed are higher in relation to effective tariff rates whether based on the value of imports or the value of dutiable goods.  For example, during the National Policy Tariffs (1879-1897), the rates on manufactured imported goods ranged from 17.5 to 45 percent with some goods of course free of tariffs.

The data on tariff revenues and the value of total imports for Canada is taken from several sources: The Jorda-Schularick-Taylor Macrodata Base, Historical Statistics of Canada (H1-18), the 2024 Fiscal Reference Tables (Table 6) and FRED.  Figure 1 plots the Canadian average effective tariff rate alongside the US one and both have declined over time.  Over the entire 1870 to 2024 period, the average annual Canadian effective tariff on imports has been 9.9 percent compared to 12.5 percent for the United States – 21 percent lower. There have been periods when our effective rate has been below the US rate but also periods when it has been above. 

From 1870 to 1914, the annual average US effective tariff rate was 27 percent while ours was 17 percent.  During the WWI period (1914 to 1918), the Canadian average was 17 percent while the US fell to 10 percent.  During the 1920s, the average rates of the two countries tracked quite closely but after 1930, the trade war era of the Smoot-Hawley tariffs saw the average US tariff from 1930 to 1939 at 17 percent while Canada’s was at 14 percent.  The post-World War II period is marked by a steady decline in average effective tariff rates in both countries with the 1950s to the 1970s seeing generally higher rates in Canada than the United States.  The average annual effective tariff rate in Canada from 1950 to 1979 was 7.5 percent while for the United States it was 6 percent.  The late 1980s saw the arrival of the Canada-US Free trade Agreement and the 1990s saw NAFTA and in their wake, tariffs came down.  However, since 1990 the average US effective tariff rate has been higher than Canada’s. From 1990 to 2024, the annual average Canadian effective tariff rate on total imports was 1.1 percent while for the United States it was 2 percent – nearly double the Canadian rate.

 

 

Going forward, the average US effective tariff rates are going to be higher, but it is uncertain where exactly they will land.  At present, estimates have ranged from 14 percent to over 20 percent, but these are likely to be unsustainable in a world that is more globalized and interdependent that current US policy makers seem to realize.  However, I would not be that surprised to see effective average tariff rates return to and stabilize at late 1970s to early 1980s levels which would bring us close to about 5 percent.  That does appear to be the time period where many of the current President's economic views, such as they are, were nurtured. Time will tell.

 

 

 

 

Federal Platforms, Costing and Fiscal Sustainability

 

The two main federal parties have released their platforms and costing and inevitability the question of whether their fiscal programs are sustainable emerges.  Trevor Tombe at The Hub has already weighed in on the Liberal platform and notes that it “marks a clear break from the government’s previous approach to fiscal policy and proposes to move Canada onto a less sustainable track.” The Liberal Platform essentially adds $225 billion in deficits to Federal debt.  More specifically, Tombe notes that: “marks a clear break from the government’s previous approach to fiscal policy and proposes to move Canada onto a less sustainable track.”  The Conservatives have also released their platform with costing and they have no plans to balance the budget either and will be adding about $100 billion to the federal debt over the next four years. 

The question that arises is whether these additions to the federal debt will make federal finances unsustainable.  The answer to this is of course dependent on what your definition of sustainability is and what the growth rate of the economy is projected to be.  The latter is a big uncertain variable given that there is trade upheaval underway with the United States and much of the increase in projected spending deals with addressing the trade upheaval and associate issues such as national security.  As for the definition of sustainability, it depends. If your benchmark for sustainability is a good credit rating on federal debt and being able to meet the debt service costs relatively easily, then both platforms are easily sustainable for the foreseeable future.

However, public finance economists have a somewhat more discerning measure that is tied to the debt to GDP ratio.  In other words, if the debt to GDP ratio is flat or falling, then the fiscal course of the public finances is sustainable.  On the other hand, if it is rising, then it is not sustainable.  So, to examine sustainability using these measures, Figures 1 and 2 plot three scenarios (Baseline taken from the Liberal Platform, the Liberal Platform and Conservative Platform). I am going to take all their numbers at face value and not get into whether projected revenues or cost savings are realistic. Having said that, the results are dependent on the rate of growth of GDP.  For each scenario, the deficits going forward from 2025-26 to 2028-29 are added to federal net debt with 2024-25 set at $1.396 trillion. Meanwhile, GDP in 2024-25 is set at 3.173 trillion. 

Going forward, the growth rates for GDP are one of two scenarios.  Figure 1 plots the estimates with an assumption of nominal GDP growth annually at 4 percent.  This is a relatively optimistic scenario all things given but not unreasonable even in the wake of the recent IMF revisions to their forecasts which reduced Canadian real GDP growth for the next two years to 1.4 and 1.6 percent.  If inflation stays at 2 percent, we are looking at nominal growth ranging from 3.4 to 3.6 percent. Figure 2 however, reduces nominal GDP growth to 3 percent annually going forward and  at 2 percent inflation yjis translates to 1 percent real annual growth. 

 

 

The results show that at 4 percent nominal GDP growth, the Baseline and Conservative platform paths both show a declining net debt to GDP ratio.  The Liberal platform at 4 percent growth is essentially stable for the next couple of years and then turns down ever so slightly.  Of the three scenarios, one would expect the Liberal platform is the one that is most sensitive to lower GDP growth and that is indeed borne out in Figure 2.  With 3 percent growth, the baseline scenario reveals at upward shift in the net debt to GDP ratio for 2025-26 and then a decline making it sustainable going forward.  The Conservative net debt to GDP ratio remains on a downward trend even with lower growth.  However, the Liberal net debt to GDP ratio going forward is clearly not on a sustainable path going forward though one may of course quibble that going from 44 to 45.4 percent over five years is hardly the end of the world.  However, should there be a recession later this year and into next year, all these scenarios will be worse.

 

 

So, it appears that even with all the spending being proposed, the federal public finances do not appear to be on a widely out of control path going forward whatever party forms the government. However, strictly speaking, some scenarios based on these assumptions are more sustainable than others.

Tariffs and Thunder Bay's Economy: Not as Bad as One Might Expect

 

As the Trump Tariff and Trade War continues, the impact on economies across Canada is front and centre in most minds.  Despite most of the national doom and gloom, my initial take on the impact of tariffs and the trade war in of the potential impact on the Thunder Bay economy was relatively optimistic.  As noted in my January 13^th, 2025, post:

“In the case of northern Ontario, the short-term effects will be mitigated by public sector activity.  For example, in major urban centres like Thunder Bay and Sudbury, a lot of employment is already either directly public sector or is based on economic activity from government contracts.  For example, Thunder Bay is in the midst of a construction boom driven by government housing money and a new provincial jail, and its transit car manufacturing just received another government funding boost.  The long-term is another matter if the country and province go into recession.”

It appears that this assessment is now being backed up by the Conference Board of Canada in their April 7^th release Major City Insights Thunder Bay which can be summarized by their overview title that the “Area may avoid worst of tariff fallout.”  It is not that tariff do not pose a risk to Thunder Bay’s economy - and that risk is largest in the city and region’s forest sector - but as the Conference Board report notes “Forestry seems the region’s industry most exposed to U.S. tariffs. This is perversely fortunate, since softwood lumber has long been subject to U.S. trade “remedies,” so local producers are well-versed in dealing with them.’

Nevertheless, growth of real GDP is expected to decline from their fall forecast for 2025 of 1.7 percent to 1.3 percent while 2026 is expected to see 0.6 percent real GDP growth.  Much as was noted several months ago: “The city will be somewhat insulated from tariff effects by its relatively large (broadly defined) public service, by ongoing construction of Thunder Bay’s $1.2-billion jail, and by manufacturing work on GO Transit rail cars.” If anything, I would expect more serious blows to the economy moving beyond 2026 given that construction on the jail is going to wind up, the prospects for regional lithium mining are more problematic in the wake of the decline in demand for electric cars and their batteries, and migration to the region from reduced federal immigration targets will hit both our post-secondary and housing sectors. Indeed, it has already hit Confederation College.

If one looks at employment changes from 2024 to 2026 based on the Conference Board estimates (See Figure 1), overall employment will be remarkably stable at about 65,000 jobs but there will be some sectoral impacts.  The direct impact of US tariffs will be primarily on our primary and manufacturing sectors and one can expect to see a total of 500 jobs lost here.  However, there is also an impact on wholesale and retail trade from the reduction in economic activity amounting to nearly 800 jobs lost followed by some job losses in education, public administration and other services.  However, there are expected to be employment gains in accommodation and food services, arts entertainment and recreation, healthcare and social assistance, transport and warehousing and construction. Overall, the losses pretty much balance out with the gains for total employment to remain in 2026 roughly where it was in 2024 and 2025.

 

 

However, the increase in accommodation and food services may be an underestimate and the decline for wholesale and retail trade an overestimate because of the shift in national and local travel patterns.  Thunder Bay might well expect to see an increase in domestic tourism visits this year as Canadians shift travel away from the United States and to domestic locations.  As well, fewer Thunder Bay residents are crossing the border at Pigeon River into the United States mirroring an ongoing national trend that has seen a significant decline especially in land border crossings into the United States.  

As Figure 2 reveals, using data for March across consecutive years, Canadian plated vehicles entering Canada at Pigeon River had begun to recover from the pandemic drop.  Over 12,000 vehicles a month returned to Canada in the months of March prior to the pandemic.  By March of 2024, the March total had recovered to just under 10,000 vehicles and for 2025 might have been expected to approach pre pandemic totals even with the decline in our dollar.  However, for March 2025 relative to the March previous there was a 34 percent drop to 6,159.  If more people in the region are spending their dollars at home, this will serve to boost the local food and retail sector somewhat mitigating the effects of tariffs.

 

 

So, will tariffs influence Thunder Bay’s economy?  Yes, there will be some employment loss, but accompanied by gains in other sectors with  the net effects at this point looking like total employment will remain stable.  However, one can expect the cost of living to rise as tariffs make everything more expensive.  In the long run, it is really anyone’s guess what will happen.  But if there is an increasing east-west orientation to Canada’s economy that requires more east-west transport infrastructure such as new pipelines and more east-west shipping of goods, expect to see Thunder Bay well positioned to take advantage of that.

 

Its Springtime in Canada and the Election Promises Come Easy

 

The federal election has taken on a somewhat bi-polar ambiance alternating from existential dread in the face of Trumpian tariff and annexation discourse to the usual vote buying behaviour with what is ultimately taxpayer’s money no matter who wins.  Indeed, the election promises have been coming fast and furious popping up like spring flowers. One might have expected that Canadians were going to get thoughtful proposals on how Canada and Europe might come together in a new economic and security alliance, perhaps with additional links that included Australia, New Zealand and the UK in a new global partnership spanning the Atlantic and Pacific via the Arctic.  This after all is probably one of Canada’s more consequential elections ranking up there with 1911 and 1988 given the focus on our economic relations with the economic behemoth to our south.

For the most part, Canada’s party leaders are not painting a compelling vision of how Canada will make its way in a dangerous and shifting geopolitical world devoid of American leadership over the next quarter of the 21^st century.  For the Conservatives, the campaign has not gone the way they were expecting given their substantial lead has evaporated with the arrival of the new Liberal leader.  The Conservatives seem unable to move beyond the baggage of the Trudeau administration which correctly speaking is indeed also the baggage of the new Liberal leader.  However, the conversation has shifted away from the baggage at the rear of the train to the oncoming Trump tariff freight train and the Conservatives have not pivoted with it. 

The NDP have quickly evaporated with progressive voters shedding them and flocking to what is perceived as the next best progressive hope.  As for the Liberals, they have been saying all the right things in the face of the existential challenge and their leader looks the part but they are short on actual details.  Indeed, there is the contradiction of Mark Carney first intoning that the old relationship with the United States is over and then after a phone meeting with President Trump saying that we will be negotiating a new economic and security relationship with the Americans.  One wonders what kind of new relationship can actually be negotiated with a President and Administration whose positions change like the wind. Indeed, one wonders if the conversation about what will be negotiated was more substantial than revealed?

When the tariff issue heats up as it did last week, it dominates the campaign’s attention.  Come April 2^nd, if the tariffs are again put on hold or are seen as not as severe, the campaigns will again revert to business as usual for Canadian elections as tariffs move into the background.  When not slagging each other’s personal finances or perceived abilities for the top job, the party leaders are hard at work laying the groundwork for a new era of deficit financed election promises.  Along with increased spending, all the parties have apparently seen the light when it comes to tax relief and indeed, they are finally addressing the needs of the lowest income earners. 

The Conservatives have pledged to slash the lowest income tax bracket rate by 2.25 percentage points to 12.75 percent.  And of course, they promise to completely eliminate the carbon tax for both consumers and industry.  The Liberals are not as generous promising only a 1 percentage point reduction down to 14 per cent and taking away the carbon tax only for consumers.  

Not to be outdone, the NDP have gotten into the act by raising the basic personal exemption – for lower income earners only - and removing the GST from an assortment of essentials including diapers.  The Liberals and Conservatives however have their own GST reduction ideas geared towards making housing more affordable by taking the GST off new homes with the point of difference being whether it should apply to homes up to$1 million or $1.3 million – assuming a million-dollar home is in your price range of course.  But, as one famous past cabinet minister in days long gone once purportedly remarked – What’s a million?

All this tax relief will have revenue implications - that at least for the Liberal and Conservative proposals, have been estimated in the six-to-fourteen-billion-dollar range.  While tax relief is welcome, all parties are also promising a lot of other things which require spending more.  And all the right buttons are being pushed depending on the day of the week and the location.   If it’s Windsor, then it is assistance and training for automobile production and workers.  If in Hamilton, support for steel in the fight against tariffs.  Rural Quebec or Saskatchewan means that our price support and regulatory systems for food products are sacrosanct. 

And if in Northern Ontario, make sure to promise an end to the red tape and a $1 billion road to the Ring of Fire to unleash the mineral development potential that has been anticipated there since at least 2007.  Though unlike a certain provincial premier who shall remain nameless, none of the federal party leaders has yet to promise that development will occur even if they have to go up there themselves and ride a bulldozer.  And of course, everyone is going to spend more on the military and the Arctic as well as make sure that robust COVID era style spending supports are available to assist both businesses and workers who might lose their jobs. And we all know how that turned out the last time.

The choice facing Canadians this election is indeed important.  If this was a normal time without the existential threats and geopolitical shifts, the Conservatives would be facing a government that was fairly long in the tooth. The Conservatives would be riding the clamour for change with their mantra that Canada is broken, and that the Trudeau Liberals have given us a lost decade culminating in an affordability crisis.  However, as noted, the ground has shifted, not that things were really that simple before.

The Canada is broken motif is somewhat of a stretch.  Millions of people do not normally immigrate to broken countries; indeed, the converse is usually true.  However, the actual handling of immigration over the last five years can be pinned on the incumbent Liberals.  While not broken, Canada could definitely have worked better on a number of fronts over the last decade particularly when it came to resource sector investments and productivity in general.  And the housing sector affordability and health care crisis has been aggravated by immigration amounts that were not accompanied by adequate investment in those critical areas.

The lost decade motif really depends on what you think has been lost.  If you are of progressive bent and favour government involvement in daily life and the economy and on social issues, then the last decade has not been lost at all. It has been a glorious aspirational triumph that has seen an expansion of the federal civil service, new permanent income supports for children, increased health transfers, school lunch programs and dental services.  On the other hand, if you were hoping for a productivity agenda that boosted business investment and generated rising per capita GDP, efficient management of public services including better health care, then it has been a lost decade.  You can see that there is a pretty strong difference of opinion here.

Of course, as has been wisely noted in this election, it is always easy to criticize and find fault especially if one is devoid of real-world experience like say an ivory tower academic might be.  On the other hand, what do we mean by real world experience?  Do a career politician or maybe even a finance guru - who all are removed from the nuts-and-bolts world of factory floor manufacturing production or a construction site – actually have real world experience?  Our politicians often portray themselves as being experienced with real world issues but in the end their primary skill is being politicians.  And they do not like informed critics, they like cheerleaders.

Even without real world experience, one can still fathom that a sudden mania for tax reductions combined with the ramping up of spending on a plethora of initiatives that have not been vetted for value for money is a harbinger of fiscal danger ahead.   Given the parallel nature of spending and tax initiatives across the major parties, combined with a lack of detail on the Trump tariff file, one is left with the realization that none of the parties probably really know what they are going to do after April 28^th.  How can they, given the mercurial volcano that is Trump? This makes the job of voting this time around even more difficult.  One sometimes envies the voters in Quebec who if faced with unpalatable choices across the three main federal parties, can always opt for the Bloc. 

Somewhere, there is an alternate reality where Canadian voters can vote for a party that combines the NDP spending and social agenda that provides a never-ending cornucopia of public goods, with Conservative managerial rectitude to ensure value for money and a reassuring Liberal technocratic global influencer as Prime Minister.  Alas, we are living in a quite different reality. A lot of spending and tax promises are being made in the heat of this springtime election.  While the easy and hopeful promises of a springtime election are palatable now, the reality is that spring and summer are short in Canada and winter always comes.

 

 

Canada's Trade with the USA Has been Shifting for Some time

 

NAFTA and its successor CUSMA have been instrumental in growing Canada’s trade and its economy by helping us find markets that have grown our export sector.  These agreements have helped cement an economic relationship with the United States such that by 2024 “ the combined value of Canada's imports and exports of goods traded with the United States surpassed the $1 trillion mark for a third consecutive year. In 2024, the United States was the destination for 75.9% of Canada's total exports and was the source of 62.2% of Canada's total imports.”  (Source: Statistics Canada, https://www150.statcan.gc.ca/n1/daily-quotidien/250205/dq250205a-eng.htm)

However, interestingly enough, the importance of the United States as a merchandise export market has actually declined somewhat and the composition of our exports to them has shifted also.  Since 1999, the total value of Canadian merchandise exports to the United States grew by over 90 percent but the value of our merchandise exports to all other countries aside from the United States grew by nearly 280 percent.  As a result, the US share of our exports declined from 87 percent in 1999 to 76 percent at present.  As well, there has been a compositional shift. 

In 1999, 30 percent of the value of our merchandise exports to the United States was motor vehicles and parts but this share declined to 11 percent by 2022.  The greatest growth in the value of our merchandise exports to the United States since 1999 was energy products, followed by metal ores and then farm, fish and food products.  Over the period 1999 to 2022, the energy share of our exports went from 9 to 34 percent, metal ores from 1 to 2 percent and farm, fish and food products went from 2 percent to 4 percent.  On the other hand, the share of forestry products declined from 13 to 8 percent, electronic and consumer goods declined from 8 percent to 3 percent, aircraft and transportation products from 3 percent to 2 percent.  In many respects, the long-term effects of NAFTA/CUSMA appear to be a decline in our export share of value-added manufacturing products and an increase in less value-added resource products.

This is of course all rather odd when viewed in the context of the Trump Administration’s desire to impose tariffs on Canadian exports.  If the goal is to move auto manufacturing out of Canada, it’s importance as a Canadian export driver has already been in decline.    If the goal is to make Canada hewers of wood and drawers of water to the American so to speak by having it specialize in resource inputs to the American economy – that is already happening.  While there have been some increases in Canada’s exports of consumer goods, metal products and industrial equipment, by far the largest increase has been in energy products.   

President Trump seems hell-bent on tariffs and applying them to everything - including energy.  Why the Americans would subject such an important input into their economy to tariffs seems rather incomprehensible.  Given our share of their energy needs, one suspects their demand is quite inelastic meaning  that energy tariffs will have few output and employment effects in Canada and the tariff will be borne primarily by the American consumer.  There may be an incentive for Americans to try and negotiate energy prices downward to compensate for the tariff impact on their consumers  but that essentially means that Americans want to have cheaper Canadian energy and use tariffs on our energy as a revenue source and ultimately have us pay for both these goals.   Why Canada would want to subsidize American energy consumers in this manner is an interesting question.  It will be crucial for Canada to quickly find alternate energy markets to forestall such a scenario.

 

 

 

Why Does Canada Exist?

 

Last evening in Paris, as Canada’s Prime Minister was exiting his vehicle and going into a building, a journalist shouted the question “Is Canada viable as a country” which really asks should Canada exist?  This question has emerged in the wake of the ongoing verbal onslaught from the President of the United States with respect to tariffs, annexation and talk of Canada becoming a “cherished” 51^st State.  One wonders if this journalist was Canadian or American.  If American, not already knowing the answer to that question can be forgiven.  If the journalist was Canadian, well that is also disappointing indeed because that question was answered a long time ago by Canada’s great economic historian Harold Adams Innis. 

Whether or not Canada should exist as a separate entity distinct from the United States has long haunted Canadians – or at least English Canadians.  Before 1763, Canada was Quebec and Quebec has never had any doubts that they constituted a distinct people and nation within their North American environment.  English Canada was settled by refugees from the American Revolution – the United Empire Loyalists – and while they also constituted a distinct cultural group within North America, the similarity of language and culture with the United States has always led to questions of distinctiveness and identity.

These questions have been aggravated by the seemingly north-south geographic grain of the continent with only the Canadian Shield being apart from that grain.  The Atlantic region appears to be but an extension of the New England states, southern Ontario essentially juts into the US northeast, the prairies are an extension of the Great Plains while British Columbia and its mountains are an extension of the Pacific Northwest. The bulk of Canada’s population is clustered along an east-west corridor within a day’s drive of the U.S. border and therefore Canada as an east west construct has seemingly been constructed in defiance of North American geography.

And yet, in his Fur Trade in Canada, Innis argued that Canada was indeed a natural rather than unnatural construct because its east-west orientation was rooted in geography and economic relationships.  Canada became a country because of and not despite its geography and the fur Trade was instrumental in bringing that about. The fur trade waterways of the Great-Lakes-St. Lawrence system and the rivers of northern Ontario, the Prairies and British Columbia and even up to the Arctic provided the east-west canoe travel network of the fur trade first under the French, then under the traders of the Northwest Company of Montreal and finally those of the Hudson Bay Company. 

As the accompanying maps illustrate, the routes of the fur trade penetrating the Canadian Shield were the first network traversing Canada A Mari Usque Ad Mare. And given their links southward via the Mississippi system or into the Washington-Oregon area, one could make as much a case that these regions are but an extension of Canada’s east-west waterways.  Many of Canada’s towns and cities were originally fur trade posts on this east-west network and when the railway came decades later, it followed this east-west line.  This east-west alignment of the country was natural according to Innis and facilitated the east-west extension of Canadian sovereignty into the west during the 19^th century.  

 

 

 

As the famous passage from Innis’s The Fur Trade in Canada goes:

“The Northwest Company and its successor the Hudson’s Bay Company established a centralized organization which covered the northern half of North America from the Atlantic to the Pacific.  The importance of this organization was recognized in boundary disputes, and it played a large role in the numerous negotiations responsible for the location of the present boundaries.  It is no mere accident that the present Dominion coincide roughly with the fur-trading areas of northern North America.  The bases of supplies for the trade in Quebec, in western Ontario and British Columbia represent the agricultural areas of the present Dominion. The Northwest Company was the forerunner of the present confederation.” (Innis, The Fur Trade in Canada, 1930/1971, p.392)

In other words, Canada was the path dependent outcome of a natural east-west economic network.  Canada exists A Mari Usque Ad Mare for reasons that are rooted in its economic history and development and not as an artificial construct.  The border with the United States is there for a reason.

 

 

Federal Finances in Review

 

The last week has been a chaotic one in Ottawa given the resignation of the finance minister on the eve of the Federal Economic and Fiscal Statement (FES), the turmoil over the Prime Minister’s leadership and the ongoing verbal assaults of President-elect Trump on Canadian sovereignty.  Nonetheless, lost in all of this is that after a considerable delay, there has finally been an update to Canada’s Fiscal Reference Tables (FRT) and Figures 1-4 here provide an overview of both the past (1966-67 to 2023-24) as laid out in the FRT and the future (2024-25 to 2028-29) such as it is laid out in the FES. 

Figure 1 provides a nice snapshot of the federal fiscal footprint – the federal spending to GDP ratio. Over the period of this chart, the federal footprint reached a  maximum of 25.6 percent in 2020-21 during the pandemic. This was of a course an outlier year and if one takes this out, one nevertheless notices that from a low of 13.9 percent in 2013-14, the federal fiscal footprint has gradually drifted upwards notwithstanding the pandemic and in 2022-24 stood at 17 percent.  While not at the level of the 1980s when it exceeded 20 percent, it remains that the federal fiscal footprint both in 2023-24 and going forward to 2028-29 is the largest it has been since the late 1990s and marks a calculated expansion of federal public sector size relative to GDP.

 

 Part of this rising expenditure has been financed via borrowing and in 2023-24 the deficit stood at nearly $62 billion.  From 2023-24 to 2028-29, Canada is forecast to accumulate another $242 billion dollars in deficits bringing the national net debt to $1.549 trillion by 2028-29. Figure 2 plots the deficit to GDP ratio, and it stands at nearly 2 percent for 2023-24 and is forecast to drop to 0.7 percent by 2028-29 – assuming of course that given the deficits projected, nominal GDP growth proceeds at 4 percent annually.  Given the slowdown in the economy that appears to be underway and the likely imposition of US tariffs in 2025, this would appear to be an exceptionally rosy GDP growth forecast.

 

 Figure 3 plots the net debt to GDP ratio, and it began to take a definite upward path starting in 2019-20 when it went to 37 percent from 33 percent the year previous.  It peaked at just over 44 percent in 2022-23 and is only going to come down slowly to about 42 percent by 2028-29.  Now, while up by recent standards, it is nowhere near where it was during the federal fiscal crisis of the 1990s.  Yet, the debt is mounting, and interest rates are higher than they were during the debt and spending spiral of the pandemic and so debt service costs have gone up.

 

 In 2019-20, debt service costs were $24.4 billion representing about 7 percent of federal revenues that year.  For 2024-25 they are anticipated to be more than double at $53.7 billion or 10.8 percent of federal revenues.   By 2028-29, it is projected that annual debt service costs will reach $66.3 billion or 11.3 percent of federal revenues.  As Figure 4 illustrates, we are again nowhere near the numbers of the federal fiscal crisis when well over 30 percent of federal revenues went to service the debt. At the same time, we appear to have settled at a plateau over 10 percent for the foreseeable future and that is money better spent on programs.

 

 In her resignation letter, the outgoing finance minister appeared to have a fiscal epiphany as she noted the need to keep our fiscal powder dry to face the economic challenges coming down the pipeline.  The trends of the last few years suggest that there has been a certain dampness to federal fiscal powder for the last few years that is expected to persist into the future.  While there is still fiscal room to manoeuvre, a large recessionary shock will quickly erode that room given the gradual enrichment of long-term  federal spending via assorted initiatives over the last decade as illustrated by the federal expenditure to GDP ratio. This suggests that dealing with a major recession will be more challenging that it would have been a decade ago.

 

 

Inflation, Productivity and Real Wage Stagnation: Canada 1960 to 2023

 

Today’s CPI inflation numbers have many breathing a sigh of relief with the expectation that with inflation below 2 percent, more interest rate relief is on the way and Canadians can resume their high personal borrowing lifestyle.   Lost in the short-term euphoria and celebration of expected lower borrowing costs is the long term cost that inflation has had on our standard of living given the low productivity gains of the last five decades.  Nowhere is this more evident than when one takes a look at how real wages have performed over time.

 

Figure 1 plots the average annual monthly hourly Canadian manufacturing wage – nominal and real – for the period from 1960 to 2023.  The nominal hourly manufacturing wage data and the All-City CPI data are both from the US Federal Reserve of St. Louis data sets [CPALCY01CAA661N; LCEAMN01CAM189S] with the real hourly wage data in $2015.   Why manufacturing wages?  Well, the manufacturing sector has generally been held up as the beacon for good quality and high paying jobs with a lot of hand wringing as manufacturing jobs have declined as a share of employment.  It sounds old fashioned but many still regard manufacturing jobs as the “high ground” of an economy in terms of value added to which I would also add the resource sector (including agriculture).

 

 

 

When nominal hourly wages are examined, their performance looks impressive.  The monthly nominal manufacturing wage in Canada in 1960 averaged $1.78/hr. By 2023, it was $30.66/hr and the average annual growth rate of real nominal hourly wages in manufacturing was 4.7 percent.  However, when adjusted for inflation using the All-City CPI for Canada with 2015 as the base year, real nominal wages barely double over the period going from $13.64/hr to $24.91/hr.  The average annual growth rate of real hourly manufacturing wages over this entire period was only 1 percent annually.  Given that at 1 percent annual growth it would take approximately 72 years for a quantity to double, we can expect real hourly wages in manufacturing to be double those in 1960 by 2032.

 

 

 

Figure 2 plots the annual average growth rate of real hourly manufacturing wages and adds a 5^th order polynomial smoothing plot.  When one examines both Figure 1 and 2, it becomes apparent that the stagnation in real wage growth really sets in during the 1970s.  There was a brief uptick in real wage growth in the wake of the FTA and NAFTA (in 1988 and 1994 respectively) but decline sets in again after the 2008-09 financial crisis.  When one combines the productivity decline that starts in the 1970s following the first oil price shock with the effects of inflation, the erosion of the standard of living – as captured by real wages – is dramatically illustrated.  It makes the case for why bringing inflation under control is so important and also why we need a productivity agenda to drive Canadian policy going into the next election.

Harris or Trump? For Canada, Post November 4th Is Going to Be a Challenge

 

As we move into the final sprint of the US election, it bears as always to pay attention to the economic implications for Canada.  Whatever one’s political priors or favorites may be in this election, in the end it needs to be realized that when it comes to US trade and economic interests, it does not matter whether Trump or Harris wins– American interests trump (no pun intended) Canadian ones.  And in the case of the economy and our trade relationship with the United States, be prepared for some tough bargaining.  While 2024 marked the 30^th Anniversary of NAFTA, it has since 2020 been replaced by the USMCA or CUSMA agreement with renewal talks beginning in 2026. 

 

Along with perennial sticking points like milk and dairy or softwood lumber, in the United States, despite what economists and evidence might say about economic growth and the benefits of trade in the wake of NAFTA and CUSMA, the debate will be shaped by the widespread belief that NAFTA in particular resulted in job losses and wage stagnation.   In the case of manufacturing, the accompanying graphic summarizes quite nicely why the Americans are going to be playing hardball.  In many respects, US manufacturing job losses did coincide with NAFTA. 

 

Figure 1 presents annual Canadian and American manufacturing employment from 1976 to 2023 using a dual scale since US employment and population in general is about ten times ours.  In 1994, there were nearly 19 million Americans employed in manufacturing and 1.8 million in Canada. In the decade afterwards, by 2005, US manufacturing employment fell to 16.2 million while Canadian manufacturing grew to 2.2 million.  In the wake of NAFTA, American manufacturing employment fell by 14 percent while Canadian manufacturing employment rose by 20 percent. 

 

 

 

 Since 2005, American manufacturing employment has declined slightly to 15.6 million while Canada’s declined to about 1.8 million where it has stabilized somewhat.  In other words, over thirty years, Canada has stayed flat in terms of total manufacturing employment (notwithstanding the rise and fall from 1994 to about 2010) while the US has seen a decline.  The good news is that since about 2019, as evidenced by the 5^th order polynomial smoothing line, both countries have seen a slight increase in manufacturing employment as a result of fallout from the pandemic, trade issues with China and the rise of onshoring production activities.

 

Yet those same polynomial smooths show a pretty consistent decline for the US since 1976 with Canada doing somewhat better.  True, Canada is not to blame for the decline in US manufacturing.  Both countries have seen a decline in manufacturing employment over time both in absolute numbers as well as a share of total employment.  It is not 1960 anymore.  There have been productivity issues in both countries as well as intense competition starting in the 1990s from China and other Asian economies as well as Mexico which is/was a part of CUSMA/NAFTA.  However, that does not matter.  For the United States, creating jobs in manufacturing will mean looking at all the players – including Canada.  It will not matter whether Harris or trump becomes President in this regard.  Notice has been served.