A rocky relationship with the United States has cast a shadow on the otherwise bright picture of the Canadian economy. Canadian’s economic reliance on the US can’t be overstated. The US is the number one purchaser of Canadian goods and supplier of imports to Canada. When the Trump administration last year notified Congress of its intent to reopen talks with Canada and Mexico to renegotiate the North American Free Trade Agreement, the move sent shivers throughout Canada.
Uncertainty about the future of NAFTA has raised concerns for those interested in investing in Canada. Some foreign businesses use Canada as a springboard for launching into the US.
One of the sticking points in the negotiations is the US’s insistence that Canada accept a five-year expiration date on any deal. The condition seems extraordinary. Businesses won’t invest if the rules could completely change in five years.
The trade dispute is a shame because it has distracted from some massive government efforts to attract investment and accelerate economic and job growth in Canada.
The government established an infrastructure bank last year to use federal dollars to leverage private investments to finance large infrastructure projects like mass transit. Canada is investing $35 billion and hopes to attract four to five times that much from private-sector sources such as pension funds.
The legislation that established the bank mandates that the infrastructure projects be revenue-generating and in the public interest, such as toll roads or municipal water and wastewater systems. The government has targeted three areas for investment: public transit, trade and transportation, and green infrastructure.
The bank is part of broad government plan to invest nearly $100 billion in the nation’s aging infrastructure. For engineering and construction companies, that is a siren call.
Canada is already well known for having one of the world’s friendliest business environments. The advantages to building a business in Canada include:
A highly educated workforce. Canada ranks fourth in the world in for building and leveraging its human capital potential, according to the World Economic Forum.
Ease of starting a business. Canada was ranked as the second-best place to start a business in the world.
A strong banking system. The financial sector has a tradition of conservative lending practices and strong capitalization. For an in-depth look at Canada, this free country profile is available.
The government isn’t taking its business-friendly culture for granted. It’s also positioning the country to compete in the twenty-first century global economy by establishing five innovation hubs of industry and research. The hubs will feature small and large business working together with research institutions and non-government organizations to make scientific advancements and grow the economy. The government will provide up to $950 million over five years across the five hubs, which the business consortiums will match. After a national competition, the government chose to focus on advance manufacturing, digital technology, plant proteins, artificial intelligence and robotics, and ocean-based industries, such as fisheries and oil and gas.
The idea is to create areas of concentrated research and development, like California’s Silicon Valley, that will launch new companies and create jobs. It’s an ambitious project for ambitious times when countries are in a global competition for talent and investment dollars.
Canada’s competitiveness has grown because of free trade with the US, starting with a bilateral agreement in 1987 and NAFTA seven years later. NAFTA dramatically increased trade and economic integration between the US and Canada. The US is by far Canada’s largest trading partner. US direct investment in its northern neighbor grew from $70 billion in 1993 to more than $363.9 billion in 2016, the latest data available.
Worries about the fate of NAFTA escalated after the Trump administration at the end of May imposed tariffs on Canadian steel and aluminum products of 25 and 10 percent. Canada retaliated with a tariff list of its own, targeting $16.6 billion worth of US imports of steel, aluminum, and other products.
The tariff dispute is adding pressure to the ongoing NAFTA talks. The termination of NAFTA would certainly disrupt the Canadian economy. The impact is hard to predict because no one knows what tariff regime would replace NAFTA. But the auto industry and other sectors sensitive to trade would feel the effects.
Here’s hoping cooler heads prevail.
Gary Hokkanen joined TMF Group as Managing Director of Canada through the acquisition of Swain & Associates in 2016. Prior to his tenure with Swain & Associates Gary was CFO to a group of development-stage public companies. He holds a Bachelor of Arts degree from the University of Toronto and is a Certified Professional Accountant.