Happy Sunday. In a 2023 column, I asked why Canada was not an economic giant. The musing stirred up over 600 comments.
The mountainous North American nation is the subject of this week’s newsletter. The near-term outlook for the Canadian economy isn’t great. The US’s proposed 25 per cent tariffs on goods from Canada could lower its GDP growth by around 4 percentage points over two years (assuming they come into force and Canada retaliates), according to a Bank of Canada estimate.
But in this edition I take a decades-long view, arguing that with an ambitious policy agenda, the G7 nation can become a major economic force.
First, a word on its potential.
Canada is the second-largest country by land mass, with the world’s longest coastline. It is bookended by the Pacific and Atlantic oceans, making it ideally situated for global trade.
Marko Papic, chief strategist at BCA Research, also reckons Canada could be better off in a warmer world. “Global warming could increase agricultural yields, open up large swaths of the country to mineral exploration, and allow for new trade routes through the Arctic,” he said.
The country is energy independent, with the world’s largest deposits of high-grade uranium and the third-largest proven oil reserves. It is also the fifth-largest producer of natural gas.
Canada boasts a huge supply of other commodities too, including the largest potash reserves (used to make fertiliser), over one-third of the world’s certified forests and a fifth of the planet’s surface freshwater. Plus, it has an abundance of cobalt, graphite, lithium and other rare earth elements, which are used in renewable technologies.
“Canada absolutely has potential to be a global superpower,” added Papic. But the nation has lacked the visionary leadership and policy framework to capitalise on its advantages.
US President Donald Trump’s tariff threat has, however, shifted the Overton window. There is now a growing political consensus to unlock Canada’s economic potential and reduce its dependence on exports to its southern neighbour. That task will fall to either Prime Minister Mark Carney or opposition leader Pierre Poilievre following an election this year.
Canada’s GDP has long trailed its G7 peers, ranking 16th globally in purchasing power parity terms. A country with its geography could clearly generate higher output. To do so, the Canadian economy needs to become more efficient, raise investment and attract more high-skilled workers. Here’s how.
The country’s mountainous terrain impedes its dynamism. But Canada places significant bureaucratic burdens on the movement of people and goods too. This includes restrictions on the sale of certain goods across provincial borders, and variations in licences and technical standards that hinder scaling, competition and efficient resource allocation across the country.
For measure, Canadian provinces export more to America than they do among themselves. A 2022 study by the Macdonald-Laurier Institute found that Canada’s economy could grow by 4.4 to 7.9 per cent in the long term — up to $200bn a year — if it eliminated internal trade barriers via mutual recognition policies. Similar reforms in Australia in the 1990s helped to boost productivity there.
Faced with the threat of US tariffs, a provincewide consensus is emerging. An Angus Reid survey found 95 per cent of Canadians now support the removal of internal trade barriers.
Simplifying its complex tax system, expediting planning processes, easing red tape for foreign direct investment and developing economic partnership mechanisms for indigenous populations, in tandem with internal trade reforms, would help businesses across the industrial supply chain tap into the nation’s vast energy and mineral resources.
Canada can play a significant role in meeting the global demand for natural gas, uranium (used in nuclear reactors) and rare-earth minerals, especially as renewables and defence sectors are booming. The country’s natural resources, as well as its potential in higher value-add production and refinement activities, are also valuable assets as nations consider diversifying their supply chains from China, Russia — and even the US.
Developing natural resource clusters around the country would support the agglomeration of related economic activities, including in advanced manufacturing, finance, and research and development. This means boosting connectivity to support trading outlets to Asia and Europe is key. Right now, around three-quarters of Canadian goods exports go to America. (Any future, friendlier US administration would then be a bonus.)
“Canada must continue to build up its trade and energy infrastructure coast to coast, including ports, roads, railways and pipelines”, says Varun Srivatsan, director of policy at the Royal Bank of Canada. The country ranks 103rd out of 113 for port turnaround times, according to the World Bank.
Next, people. With a population of just 40mn, Canada is one of the world’s least densely populated countries. But remarkably, it also has one of the developed world’s worst housing shortages. Average house prices have tripled in the past two decades, with high mortgage debt straining consumer spending.
This is both a demand and supply problem. Immigration jumped under former Prime Minister Justin Trudeau, helping to expand the country’s sparse labour market. But it also strained public infrastructure, which did not develop at the same pace.
Tighter immigration controls will provide temporary reprieve. But with an ageing population and a relatively small labour force, Canada needs to continue to attract talent over the long term. (Artificial intelligence and robotics — which both require investment — can only go so far.)
This shouldn’t be too difficult. Canada outperforms the average on the OECD Better Life Index in education, health and life satisfaction. Calgary, Vancouver and Toronto are ranked among the best cities to live in. And Canada is the world’s most appealing destination for the university educated, according to the Economist, which estimates about 17mn graduates would move there if they could.
Building more homes will ensure it remains attractive and affordable for both domestic and international workers. (Canada doesn’t utilise immigrants’ skills as efficiently as it could either. A harmonised, nationwide recognition of foreign credentials would help, notes the OECD.)
This is not an exhaustive list of policies. But they ought to be among the long-term priorities for any Canadian administration seeking to capitalise on the nation’s enormous, latent potential.
Does Canada have the money? It has the G7’s lowest net debt and deficit levels as a percentage of GDP. So growth-enhancing investment could be financed in part by borrowing. But gross debt is high.
Canada also has vast pools of capital and expertise in its world-class pension funds — the “Maple Eight” (its largest pension pots) oversee $1.6tn in assets. They could back lucrative capital investments in the country. Natural resource revenues could be channelled into a sovereign wealth fund as in Norway with provincial buy-in. And so long as infrastructure and less red tape enable it, FDI would be plentiful.
The Canadian economy is at a crossroads. The belligerence of its main trading partner is driving consensus around boosting the national economy. The world needs what Canada has in abundance. The nation has a unique chance to reach its potential. If it wants to.
Rebuttals? Thoughts? Message me at freelunch@ft.com or on X @tejparikh90.
Food for thought
Here’s another possible explanation for Britain’s productivity puzzle. Kallum Pickering, chief economist at Peel Hunt, ran an interesting analysis that linked falling electricity supply to weak productivity growth in the UK. Could it be that Britain has simply lacked the energy to grow faster?
