Donald Trump is threatening to use “economic force” to make Canada the 51st American state. While his comments may be reckless, they are in part due to Canada’s over-reliance on the United States market in terms of trade.

The benefits of international trade are undoubtedly positive. It’s well-established that when countries can produce a product or service more cheaply than others, giving them what’s known as a “comparative advantage,” all other nations engaged will gain from that trade.

There are additional gains that come from economies of scale as companies get access to much larger markets than are available domestically. These include improvements in efficiency that arise through enhanced market competition, resulting in lower costs of production and reduced prices for consumers, and increases in the variety of goods and services available.

Canada has outgrown many of its protectionist roots and is now a trading nation. Despite having only 0.5 per cent of the world’s population, Canada has 2.2 per cent of the total of world trade. Exports of goods support one out of every six Canadian jobs.

While the Canada-United States-Mexico Agreement (CUSMA) and its predecessor, the North American Free Trade Agreement (NAFTA), garner most of the headlines, Canada has a total of 15 free-trade agreements covering 61 per cent of world GDP, providing Canadian companies with access to 1.5 billion consumers worldwide.

And Canada is seeking even more free-trade agreements, given their demonstrated benefits.

Made-in-Canada solution?

But the key challenge Canadian policymakers face is an over-reliance on the U.S. as Canada’s primary market, with 75 per cent of all Canadian exports headed south.

One of the first lessons in business is not to put “all of your eggs in one basket.” Canada clearly needs to diversify its trading partners, which is no easy feat. But there is a “made-in-Canada” solution to potential clouds on the international trade horizon.

The U.S. makes for a natural trading partner, given its large market and close proximity to Canada. The two countries share similar cultural norms and legal systems, and the same time zones and existing infrastructure, including ports, railways and bridges.

There’s also new infrastructure planned, including the Gordie Howe International Bridge connecting Windsor and Detroit that will facilitate cross-border trade when it opens later this year.

But the over-reliance of Canadian exports to the U.S. exposes Canada to significant risks that can result from unilateral American trade policies.

Canada’s preferential access to the U.S. market can no longer be assured, as shown by the protectionism that came with Donald Trump’s first term in office. In his book The Retreat of Western Liberalism, Edward Luce, an editor with the Financial Times, argued there would be no “snap back,” meaning a return to the status quo before the first Trump presidency.

When Joe Biden became U.S. president in 2020, American protectionism not only remained, but intensified with aggressive new tariffs. With the return of Trump, who is promising even more tariffs on Canada, it seems Luce was right. There will be no snap back, and Canada can no longer take easy access to the U.S. market for granted.

Provincial trade obstacles

One of the ironies in Canada’s quest for more free-trade deals around the world are interprovincial trade barriers that exist within Canada. A Canadian Senate report on Canada’s free-trade agreement with Europe notes that “European companies have easier access to some Canadian markets than Canadian companies from another province.”

The Canadian Federation of Independent Business (CFIB) has said “it’s easier to do business in the U.S. than in another part of Canada.”

Bringing down inter-provincial trade barriers could result in countless benefits. One study estimates that the existence of such barriers has resulted in the price of consumer goods and services in Canada being higher on average by eight to 15 per cent than they would be in the absence of those barriers.

The study argues if interprovincial trade barriers were removed, there would be an improvement in Canadian productivity of between three and seven per cent. In dollar terms, that would add $50-$130 billion (CDN) dollars to Canada’s economy. The CFIB findings put the figure at $200 billion, or $5,100 per person.

There are further benefits. Bringing down barriers to trade across Canadian provinces would create conditions that could enable Canadian companies to be more competitive internationally, and beyond the U.S. market in particular.

Enhanced competitive forces that would flow from reduced inter-provincial trade barriers would allow Canadian firms to access a much larger share of the Canadian economy, thus allowing the most productive and innovative Canadian firms to grow.

These forces would result in increased business investment, productivity, spending on research and development and enhanced innovation. More innovative and productive companies in Canada would expand, improving Canadian productivity and prosperity. Incomes in Canada would rise. These changes would also make Canadian companies more competitive internationally.

Canada’s abysmal productivity levels

I am currently conducting research with colleagues employed by the Government of Canada — Jianmin Tang of Innovation, Science and Economic Development Canada and Weimin Wang from Statistics Canada. We’re finding that the best way for Canadian companies to compete in markets further away — that are different culturally, institutionally and in other ways — is to enhance their own productivity.

Companies with higher productivity rates are able to more successfully penetrate markets in Latin America, Europe, Africa and the Middle East — markets that would help Canada decrease its reliance on the U.S. market.

But Canada has a major productivity problem. Economic productivity is a measure of the rate at which the output of goods and services are produced per unit of input (for example, labour, capital and raw materials). Simply put, Canada’s productivity levels are atrocious.

The senior deputy governor of the Bank of Canada described these challenges as an “emergency,” which is generally not the kind of language used by conservative central bankers.

What does poor productivity performance mean for the average Canadian? Incomes and purchasing power suffer significantly.

There are many policy changes that are needed to reverse Canada’s poor productivity performance. Dismantling inter-provincial trade barriers is a great place to start, and would help “trump” the rising obstacles to international trade.

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