After a hiatus following last year’s federal election, Canada seems to have rediscovered the joys of talking tough to America. Ontario Premier Doug Ford suggests we could “shut down” the United States by restricting electricity exports.
Really?
Canada could certainly make life uncomfortable in parts of the United States. But causing discomfort doesn’t automatically win you an economic confrontation. The Americans can inflict far more economic damage on us than we can on them. The two countries’ relationship is not symmetrical. Pretending otherwise does not make it so. Prime Minister Mark Carney appears to understand this. He says using electricity as a threat against the United States would be unwise — which is true.
It may also be clever negotiation. By publicly rejecting the use of electricity as a weapon, Carney appears responsible and reasonable while also ensuring Washington understands Canada has an important economic lever it could, in extremis, pull. Showing we have leverage while emphasizing we choose not to use it recklessly is much defter than threatening to “shut down” America.
On the other hand, Carney speaks as if he were the natural leader of “the middle powers,” though he leads the middle power most dependent on the U.S. Yes, Canada should diversify towards Europe and Asia, but geography still matters.
Carney’s more important reforms need to take place at home. Economic necessity is forcing Canada to reconsider recently conventional assumptions. The proposed increase in the capital gains tax was abandoned last year despite Liberal voters’ customary concerns about inequality. And after 10 years of worrying about climate, Canada is re-discovering the value of oil, gas, minerals, electricity and other natural resources. A federal government that seemed to regard resource development as mainly an embarrassment now recognizes how it creates wealth, jobs and strategic strength.
That’s all to the good. But it is occurring only because economic reality has forced it. Part of that reality is quiet “Canexit” — investment leaving for the United States because of uncertainty. Without any dramatic announcement, a board simply decides its next billion-dollar project belongs elsewhere. Increasingly, even Canadian companies are choosing to expand south of the border.
As money leaves, governments help workers and try to bribe investors to stay, so deficits rise. That may boost GDP in the short term, but government spending is not the same as creating lasting wealth.
Canada’s real problem is productivity. We have become very good at increasing the size of the economy by increasing the number of people in it. But population growth is not the same as rising prosperity. We need to produce more value per worker. That requires more investment, both public and private, and fewer regulations and barriers to internal Canadian trade. To be fair, Carney seems to recognize this.
Does he also recognize that Canada needs to re-think how it taxes success? If we are serious about competing with the United States for investment, talent and innovation, our tax system needs to be more competitive. We need to make it simpler and more investment- and work-friendly.
We might consider a newcomer tax regime similar to the United Kingdom’s recent reforms, which exempt immigrants’ foreign income and gains from domestic taxation during their first four years in the country.
At the moment, people who become Canadian tax residents are generally subject to Canadian tax on their worldwide income, including capital gains that accrue after they come here. A four-year newcomer exemption would leave foreign interest, dividends and other investment income outside the Canadian tax net, with gains realized on foreign assets not taxed in Canada.
Such a policy would encourage entrepreneurs, investors and skilled professionals to relocate, bring capital to Canada and establish businesses here. It would give immigrants four years to fully integrate into the Canadian tax system. Such measures would strengthen Canada’s sovereignty, not diminish it.
Canada’s traditional economic advantages are becoming more valuable. AI requires electricity. The energy transition requires minerals. Defence industries require secure supply chains. A country with hydroelectricity, uranium, critical minerals, oil, gas, forests, agricultural land and access to three oceans possesses increasingly valuable strategic assets.
Canada’s objective should not be to pretend we are America’s equal. We aren’t. But small and medium-sized countries can become enormously prosperous. Sweden, Switzerland, Norway and Singapore did not succeed by pretending to be large. They succeeded by becoming productive, competitive and impossible to ignore.
Canada has all it needs to do the same. We should stop exaggerating the leverage we imagine we have over the U.S., lower our elbows and start building the economic strength we need. Our long-term objective should be a Canada the United States cannot afford to ignore.