December is the season of reflection on the year that was, and bold predictions for the year to come. Here’s my not-so-hot take for 2025: there will be plenty of change in Canadian economic policymaking.
The spectre of Donald Trump looms over Canada, and he’ll force us to rethink our role in the world, how we run our economy, and how we trade.
Policymakers will face tough choices and will need to stress-test some core assumptions about economic policy in a Trumpian world.
Here are a few questions Canadian policymakers should be asking themselves in 2025:
1. Can the Canadian dollar continue weakening?
Canada has operated with a floating exchange rate for more than half a century—longer than any other country. When commodity prices are weak or we’re facing an economic shock, we’ve relied on a weaker currency to absorb the hit, making our goods more competitive abroad while discouraging imports. A weaker currency helps mitigate slowdowns, in part by reducing demand here for U.S. goods and services.
We’ve seen this dynamic at work in 2024, as our currency dropped almost 8 percent against the U.S. dollar this year—reflecting much stronger growth prospects south of the border. The expectation is we’ll be able to continue using our currency as a “safety valve” should Trump follow through on his pledge to introduce measures like blanket 25 percent tariffs. However, this assumption may no longer be valid.
The reason we’ve been able to treat the exchange rate as something external to the decision-making process is that Canada, as a small open economy, was assumed to fly under the radar. But Trump is fixated on bilateral deficits and currencies and oblivious to the complexities of global supply chains. He actually does care what Canada’s trade balance with the U.S. looks like, and he may care about the weakness of the Canadian dollar.
Canadian policymakers may start finding themselves in the position of actively having to worry about trade numbers and the value of the Canadian dollar, which would have serious implications for the Bank of Canada and complicate its ability to counter a slowdown.
This is an issue lawmakers may need to address as the Bank’s mandate comes up for review in 2026.
2. Do we need to rethink our open trade policy?
While it will take time for the current consensus on trade policy to evolve, current trends suggest there will be pressure to reverse Canada’s decades-long efforts toward global trade liberalization. Over the past 50 years, Canada has pursued a dual strategy: securing access to the U.S. market while negotiating free trade agreements with other countries. These approaches may now conflict.
Trump could seize on not only Canada’s large trade surpluses with the U.S. but also our large deficits with the rest of the world. He could argue that Canada uses the proceeds from our massive trade surplus with the U.S. to buy goods from China and the E.U. Simplistic but factual.
Ironically, one solution to Trump’s concerns may be deeper integration with the U.S. Canada could attempt to correct its trade imbalance by importing more from its American partner while raising barriers with other trading partners.
Ultimately, no matter what Trump does, the U.S. will continue to dictate Canada’s trade posture. As the global economy fragments, Canada’s ability to pursue independent trade policies diminishes.
3. Are there alternatives to a weaker currency and fragmented global trade ties?
A more sustainable way to improve Canada’s trade balance with the U.S. is to pursue an investment-led growth model, which would both support the Canadian dollar and drive up our demand for U.S. goods.
Obviously, this is easier said than done and would take time. It’s not even fully in our control. We need strong commodity prices—probably a bit stronger than we have right now.
And we would need a host of other domestic measures, including a less cumbersome regulatory system and probably even lower corporate taxes.
But an investment-led pick up in economic growth would resolve a lot of the difficult trade-offs associated with a Trump administration.
Investment tends to be import-intensive, meaning Canada would buy more machinery and equipment from the U.S., improving the trade balance. A strong investment-driven economy, meanwhile, would attract foreign capital and support our currency, which would boost demand for consumer goods from the U.S.
This approach would require a serious debate about the role of fiscal policy in attracting investment. While concerns about the nation’s finances are valid, there are arguments to be made for loosening fiscal constraints in order to confront Canada’s growth challenges.
Former finance minister Chrystia Freeland alluded to this approach on Monday in her resignation letter to Prime Minister Justin Trudeau. Taking the threat of Trump seriously means “pushing back against ‘America First’ economic nationalism with a determined effort to fight for capital and investment and the jobs they bring.”
4. What can we salvage from Trudeau’s climate policy?
To drive a more investment-focused economic agenda, a course correction on climate policy will likely be needed. Our wide-ranging climate transition framework—complex, inefficient, and saddled with unrealistic timelines—is already too costly and economically damaging to be sustainable. As such, it’s unlikely to endure, whether under this government or the next. The carbon tax carve-out for Atlantic Canadians last year was not an isolated event but likely the beginning of a broader unraveling of Canada’s climate policy structure.
Whatever replaces the current framework must shift from lofty, unattainable targets to a strategy that aligns with global realities and preserves Canada’s competitiveness on the world stage. We can no longer pretend that Canada isn’t a major commodities producer.
This article originally appeared in the Means & Ways with Theo Argitis newsletter.
