This week, the ongoing fallout from Donald Trump’s threat of tariffs has led to growing calls for everyone, including Conservative Party leader Pierre Poilievre, to put aside their differences and join Team Canada. The essential argument is that we need to subordinate partisan disagreements and focus on our shared objective of protecting Canada’s economy from the imposition of tariffs. Fair enough.
The problem however is that Team Canada’s gameplan is too defensive. It’s narrowly focused on conceiving of policy concessions to placate the incoming Trump administration and stop the tariffs.
If you’ll permit us to stick with the rather banal Team Canada metaphor for one more moment, when Canada’s men’s and women’s hockey teams have defeated the Americans, they haven’t solely relied on defending against goals. They’ve been offensive. They’ve sought to compete and win by scoring their own goals.
As we set out last weekend, we believe that there’s a real risk that the purpose of Trump’s tariffs isn’t simply to induce defensive concessions from Canada. They’re instead designed to offset Washington’s budget deficits and strip jobs and production out of Canada and into the United States.
If we’re right, the proper Team Canada response isn’t a defensive one. It’s an offensive one. We need a plan to meet the incoming Trump administration’s threat to our economy by outcompeting it for investment and employment.
We’ve come to think of this alternative policy agenda as “Plan B.” In parallel with current efforts to identify issues and policy reforms that could be put forward in a bilateral negotiation, Canadian policymakers should also be committing themselves to a renewed competitiveness agenda.
Plan B would thus comprise a set of pro-competitiveness policies that aim to match and ultimately exceed America’s economic competitiveness. This point is worth emphasizing: it’s not enough to enact policies that merely bring us into proximity of America’s investment and job creation climate. The asymmetry of our market size, the sophistication of its capital markets, the relative share of our economy still sheltered from competition, and now the possibility of 25-percent tariffs require that we have to overcompensate—we must become more competitive than the U.S.
As the Irish example has demonstrated in recent years, the goal of Plan B should be to signal to businesses and investors that Canada is the most hospitable climate for investment and job creation on the continent.
This offensive response would need to manifest itself in various policy reforms. First and foremost, the federal government should be thinking about significantly lowering its general corporate tax rate. Due to inflation and other factors, Ottawa’s corporate tax revenues have nearly doubled since 2019. That suggests that we’re on the wrong side of the Laffer Curve: there’s room to cut the corporate tax rate and not experience much, if any, revenue loss—especially if compared to an alternative scenario where the tax base shrinks due to capital flight to the U.S.
During the Harper government, there was a concerted effort by then finance minister Jim Flaherty to have Ottawa and the provinces cooperate on lowering the combined corporate tax rate to 25 percent. The momentum behind that effort has since stalled. We should renew it. But rather than targeting 25 percent, the plan should get down much lower. As Trevor Tombe has recently shown, something more like a 15-percent combined rate would bring us closer to Ireland.
Another policy area is capital taxation. The Trudeau government’s populist attempt to wedge the Conservatives with a capital gains tax increase looks even more dubious in a world in which capital is facing new pull factors into the U.S. Analysis produced by Jack Mintz has demonstrated that the government’s estimates already underestimates the economic costs—and that’s before heightened competitive pressures from the U.S.
Reversing the 2004 budget’s tax hike therefore is an obvious first step. But there’s a case for going even further. One option would be to consider adopting the Opportunity Zones model from the U.S. which involves a series of tax preferences on capital that flows into rural and economically distressed parts of the country. This would not only represent a politically feasible way to lower taxes on capital, but in an offensive strategy to attract and protect capital, it may help on the margins to pull into it parts of Canada’s economy that really need it.
The third is competition reform. Canada’s form of “Laurentian capitalism” whereby the government shelters key sectors from competition in exchange for requiring large incumbent firms to engage in non-profit-driven activities like running unprofitable radio stations or lowering fees for carry-on bags already seemed unsustainable. In the face of a new competitive threat posed by Trump, it would be irresponsible not to open up sectors like supply management and telecommunications.
It must noted though that such a liberalization agenda shouldn’t be limited to legislated restrictions against foreign ownership. It has to also extend to the myriad of government interventions into these sectors that effectively treat them as wards of the state. Ending Laurentian capitalism, in other words, is about fully freeing up these companies and industries to the diktats of the market.
A final policy area is deregulation. Canada consistently appears near the bottom of the OECD in its ability to build projects and generally get things done. This had has a chilling effect on investment. It’s not a coincidence for instance that we’ve seen a significant drop in oil and gas investment at the same time that the Trudeau government has imposed a series of new regulatory requirements on the sector.
Reforming Canada’s regulatory approval and permitting regime for major resource projects must therefore be a top policy priority. Except for basic environmental considerations and a prescribed role for Indigenous consultations, policymakers should be pushing the regulatory process up to its constitutional limit.
More generally, federal and provincial governments should be undergoing efforts of radical deregulation. The goal here shouldn’t be to cap or manage the regulatory stock. It should be to significantly reduce it. One practical step is that provinces should undertake an exercise of mutual recognition or even regulatory harmonization to eliminate needless policy divergences. Interprovincial trade barriers are a major opportunity cost that we shouldn’t absorb in normal circumstances—and we cannot afford when the economy is under threat.
This brings us to a bigger point: we’ve often observed in recent years that Canadian politics are now dominated by microeconomic concerns and that it’s been hard to find a constituency for the type of macroeconomic reforms that are necessary to boost output, investment, and productivity. Politicians of course have had to be responsive to public sentiments and so we’ve seen a competing set of policy offerings that speak to the pocketbook rather than economic stagnation. Our politics in short have been defined by a short-term transactionalism.
We wonder if the economic threat posed by Trump and his tariffs has the potential to breaks us out of this unproductive cycle by creating public demand for a macroeconomic agenda. Policy reforms like the ones set out above may no longer be viewed suspiciously as pro-business or inegalitarian. They may instead be seen as parts of a necessary policy agenda to protect investment and jobs from being pulled across the border. If so, policymakers might secure public support for policy measures that would otherwise find limited political salience and even come with considerable political risk.
Here’s the upshot: as Canadian policymakers grapple with how best to respond to Trump’s tariff threat, a defensive strategy is a necessary yet insufficient plan. We need a Plan B for the eventuality that tariffs are implemented in January 2025 and our economy faces significant competitive pressure for capital and jobs. What’s interesting though is that such an economic threat may actually create a political opening for Plan B to shock Canada’s economy out of stagnation.
Over the coming weeks, The Hub will publish a series of articles and commentaries on what macroeconomic reforms might comprise a Plan B agenda. Stay tuned.
