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Declining Canadian dollar could stifle productivity growth in Canada

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From the Fraser Institute

By Steven Globerman and Lawrence Schembri

The Bank of Canada’s decision last week to lower its policy rate by 50 basis points increases the gap between the U.S. Federal Reserve’s policy rate and the Bank of Canada’s rate to approximately 130 basis points. While this gap might close somewhat if the Federal Reserve lowers its rate at its meeting this week, a substantial U.S. premium will still exist.

Since borrowing rates are tied to policy rates, interest rates in Canada will remain well below those in the U.S. for the foreseeable future. This gap will continue to put downward pressure on the value of the Canadian dollar against the U.S. greenback, as investors favour higher-earning U.S. dollar-denominated assets over Canadian dollar assets. President-elect Trump’s threatened trade actions against Canada could also exert further downward pressure on the loonie, especially if the Bank of Canada responds to Trump’s actions by making additional rate cuts. For context, it took $1.33 Canadian dollars to purchase one U.S. dollar on January 1, 2024, compared to $1.43 Canadian dollars on December 13, 2024. This represents a substantial depreciation in the Canadian dollar’s value of approximately 7.6 per cent over the period.

What effects will a declining Canadian dollar have on the Canadian economy?

In short, it will increase demand for domestic output and labour and put upward pressure on inflation via higher import prices, and it could also lower productivity growth and further hurt living standards.

Why the impact on productivity?

Because Canada imports most of its machinery and equipment (including information and communications technology) from the U.S. and other countries, and investment in this type of physical capital helps drive productivity growth. A declining Canadian dollar makes capital equipment imports more expensive, thereby discouraging investment and slowing productivity growth. A declining Canadian dollar may also shelter domestic firms from foreign competition, which could dampen their incentive to invest in productivity-enhancing assets, even if they price their output in U.S. dollars.

Hence, if the Canadian dollar remains weak against the U.S. dollar and other currencies, it may be more difficult to reverse Canada’s productivity woes. Again, productivity—the amount of GDP per hour of labour the economy produces—is key to improving living standards, which have been on the decline in Canada. From July to September of 2024, the economy grew by 0.3 per cent yet per-person GDP (an indicator of living standards) fell by 0.4 per cent (after adjusting for inflation).

Canada also indirectly imports technology via direct investments made by U.S.-based companies in their Canadian subsidiaries. While a declining Canadian dollar makes it cheaper for U.S. companies to buy assets in Canada, it also reduces the U.S. dollar value of profits earned over time in Canada by American-owned companies. This phenomenon, combined with an unstable Canadian dollar, might discourage inward foreign direct investment and associated technology transfers by increasing the financial uncertainty of such investment.

To be clear, this is not a criticism of the Bank of Canada’s move last week to help lower domestic interest rates given the Bank’s primary mandate to meet its inflation rate target of 2 per cent. Rather, governments—including the Trudeau government—must enact policies to encourage business investment in productivity-enhancing assets.

For starters, policymakers should reduce business tax rates and the tax rate on capital gains, to encourage innovation and entrepreneurship. They should also dramatically reduce the regulatory burden and other barriers to entry and growth, especially those faced by small and medium-sized businesses. And the federal and provincial governments should increase competition in the domestic economy by reducing interprovincial trade barriers.

For example, the provinces could adopt a policy of “mutual recognition” so the standards and licencing requirements in one province would be accepted by all provinces. Provinces can also unilaterally eliminate self-imposed trade barriers (as Alberta did in 2019 with grazing permits for livestock). Of course, due to resistance from special interest groups that benefit from internal barriers, such reforms will not be easy. But the economic risks to the Canadian economy—from even the threat of a trade war with the U.S.—could generate support among Canadians for these reforms. Indeed, reducing interprovincial barriers to trade and labour mobility might be the single most important thing that governments in Canada could do to improve productivity.

With Canada’s lower inflation rate, weaker labour market and weaker economic growth outlook compared to the U.S., lower interest rates in Canada seem appropriate. Bank of Canada Governor Tiff Macklem wants to see economic activity pick up to absorb slack in the economy and prevent inflation settling below the bank’s 2 per cent target. Clearly, the Bank should focus on inflation and domestic economic conditions. But policymakers must do their part to create a better environment for investment and innovation, the keys to productivity and increased living standards for Canadians.

Steven Globerman

Senior Fellow and Addington Chair in Measurement, Fraser Institute

Lawrence Schembri

Senior Fellow, Fraser Institute

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Trump announces 25% tariff on foreign automobiles as reciprocal tariffs loom

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From The Center Square

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President Donald Trump announced a permanent 25% tariff on automobiles made in other countries that will go into effect on April 2.

Trump made the announcement Wednesday in the Oval Office. He also hinted that the reciprocal tariffs he plans to announce on April 2 could be more lenient, suggesting the tariffs would be less than fully reciprocal.

“What we’re going to be doing is a 25% tariff on all cars not made in the U.S.,” the president said.

Asked if any changes could avert the auto tariffs, Trump said they would be “permanent.”

“This will continue to spur growth like you haven’t seen before,” Trump said.

Trump said the tariffs will be good news for auto companies that already build products in the U.S. He also said carmakers that don’t build in the U.S. are looking to do so.

“We’re signing an executive order today that’s going to lead to tremendous growth in the automobile industry,” Trump said.

The White House said it expects the auto tariffs on cars and light-duty trucks will generate up to $100 billion in federal revenue. Trump said eventually he hopes to bring in $600 billion to $1 trillion in tariff revenue in the next year or two.

Trump also said the tariffs would lead to a manufacturing boom in the U.S., with auto companies building new plants, expanding existing plants and adding jobs.

Trump also urged House Speaker Mike Johnson to approve a measure that would allow car buyers to deduct the interest on loans for cars that are made in America. Trump said that such a plan would make cars nearly free for buyers.

“So when you get a loan to buy a car … I think it’s going to pay for itself, I don’t think there’s any cost,” he said.

Trump also said the reciprocal tariffs he plans to unveil on April 2 would be fair.

“We’re going to be very nice actually,” he said. “It’ll be, in many cases, less than the tariff they’ve been charging us for decades.”

European Commission President Ursula von der Leyen said tariffs would hurt businesses and consumers.

“I deeply regret the U.S. decision to impose tariffs on European automotive exports,” she said. “Tariffs are taxes – bad for businesses, worse for consumers, in the U.S. and the EU.”

Business groups, including the U.S. Chamber of Commerce and American Farm Bureau Federation, have urged Trump to back off tariff threats.

Trump has promised that his tariffs would shift the tax burden away from Americans and onto foreign countries, but tariffs are generally paid by the people who import the products. Those importers then have a choice: absorb the loss or pass it on to consumers through higher prices. He also promised tariffs would make America “rich as hell.” Trump has also used tariffs as a negotiating tactic to tighten border security.

Tariffs are taxes charged on imported products. The company importing the products pays the tariffs and can either try to absorb the loss or pass the additional costs on to consumers.

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While “Team Canada” attacks Trump for election points, Premier Danielle Smith advocates for future trade relations

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“Today, I addressed the Legislative Assembly and spoke to the actions that the Government of Alberta has taken and will continue to take to advocate for Alberta and Canada’s interests in the U.S. as we continue to face the threat and imposition of tariffs.”

Mr. Speaker,

When U.S. President Donald Trump first announced his threatened tariffs against Canada, and began musing about our country becoming the 51st state, many Canadians – and Albertans – feared for their futures.

Why? Because, regardless of our political stripe, we all knew the imposition of 25% tariffs on all Canadian goods to the U.S. would cost the jobs of hundreds of thousands of Canadians, would depress our economy, devastate our budget and damage the sovereignty of our country.

And in the roughly 4 months until just before last weekend’s federal election call, Premiers, party leaders and Canadians were united (other than perhaps the Alberta NDP) in working as hard as we could to convince the U.S. President and Congress to reconsider these unjustified actions against our country.

In fact, Premiers were all encouraged by each other as well as the former Prime Minister and his ministers, to visit the U.S., get on U.S. media, speak with every U.S. official and influencer we could find to convince the U.S. President to refrain from imposing these tariffs.

It was all about working as ‘Team Canada’ for the greater good.

Enter Liberal Prime Minister Mark Carney.

Now, all of a sudden, it is treason to talk to American media personalities that we disagree with. It is disloyal to try and persuade high-profile Republicans holding influence with the President to abandon his tariff policies on Canada. Indeed, it is a high crime to try and convince U.S. officials to refrain from imposing tariffs until after our country has an elected leader with a strong mandate.

Shame on all who dare to speak with the enemy, they say!

These are the Team Carney and Nenshi NDP talking points.

Their endgame is quite obvious. Frighten and divide Canadians. Try and make Canadians forget the utter incompetence of Liberal and NDP policies inflicted upon this country over the last 10 years. Associate conservatives with President Trump. And if they play their cards just right – and sprinkle in just enough anti-Alberta rhetoric – presto – Canada can elect another Liberal majority government.

Well – the Carney Liberals and Nenshi NDP are right about one thing…our country is indeed vulnerable right now.

And the reason why is as clear as a sunny Alberta day.

It is because for the last 10 years, Liberal and NDP leaders across this country – both federal and provincial – have repeatedly sold out Canada and Alberta with policies that have landlocked our immense natural resources, made nation building projects impossible to finance and build, and have made securing access to our ports an exercise in frustration and futility.

These Liberal and NDP leaders – from Trudeau to Singh and now to Prime Minister Mark Carney – have done everything in their power to sow investment uncertainty, add impossibly high costs on the development of our resources, and have disastrously weakened our security and military – and all in the name of their green extremist religion and its cult leaders named Guilbeault, Suzuki, Gore and Thunberg.

And the results are obvious – Canadians are poorer than Americans – overly-dependent on the Americans – and vulnerable to many nations including the Americans.

Canada has indeed been sold out – big time – and it’s been sold out by the utter incompetent, self-righteous and extreme policies of Liberal and NDP leadership across this country – including the Nenshi NDP here in Alberta. From C-69, to oil and gas production caps to tanker bans to a dozen other examples – the Liberals and their allies have attacked the Alberta and Saskatchewan economies mercilessly.

But despite all that – despite the 10 year attack on Alberta by our own federal government – when tariffs were threatened on our fellow Canadians and the federal Liberals realized they had no contacts or allies anywhere in the new U.S. administration…what did the Alberta Government do?

Did we cower in the corner madly texting our tweets about hating Donald Trump on X?

Did we turn into part time TikTok rage farmers to stir up as much fear and loathing of Americans as humanly possible?

Did we give up, throw our hands in the air, express righteous indignation – but do nothing to fight against the threat posed against our province and country?

No – that’s what the Nenshi NDP did of course – but we, Alberta’s UCP government, did not.

Instead, our government did exactly what Albertans expected us to do – we decided to fight tooth and nail for Albertan and Canadian jobs and sovereignty.

My ministers, officials and I have spent hundreds of hours over the last several months talking with, lobbying, educating, and persuading every U.S. lawmaker and media influencer that was willing to listen, about how damaging and wrongheaded imposing tariffs on Canada would be for Americans, and the millions of American jobs that would be lost because of them.

I’ve made this case repeatedly to the American people and their leaders – especially Republican leaders – from the President of the United States personally, to members of his Cabinet to Senators to governors to members of congress to podcasters to media personalities.

I’ve lost track of how many nights I have spent in uncomfortable hotel beds and in airports – doing everything humanly possible to stand up for Canadian and Alberta workers and families.

Convincing U.S. Officials to refrain from putting tariffs on any Canadian goods. Asking that they respect the current free trade agreement and not begin renegotiations until Canadians elect a new Prime Minister with a strong mandate.

Doing all we could in Alberta to secure the U.S. border and urging the Liberals to do the same across the country so we could further delay the implementation of tariffs.

And it hasn’t just been Alberta – several other Premiers – particularly conservative Premiers – from Premier Scott Moe to Premier Tim Houston to Premier Doug Ford – have been doing the same thing.

And the results – it has been almost 4 months since the President first threatened tariffs on Canada, and although steel and aluminum are being wrongfully tariffed at this time – the tariffs on remaining Canadian goods sit at zero today – rather than the threatened 25%.

And what has the Nenshi NDP done to contribute to this effort? Not a single thing other than raging against this government for every effort made to protect Albertans.

Needless to say, there is not a doubt in my mind that had the Nenshi NDP been in charge during this period, we would likely have long ago been hit with across the board 25% tariffs and lost thousands of Alberta jobs already.

Because the NDP have no idea what diplomacy is as they don’t know how to talk constructively and effectively with anyone they disagree with.

Glad we never need to find out.

Our government’s advocacy has made a massive difference for Albertans and Canadians.

That’s a fact.

But now, we have another tariff deadline looming on April 2nd – and I am off to the U.S. yet again to try and speak to Americans this time through the 2nd largest podcaster in the world whose audience is made up of exactly the people we need to persuade to convince their president to change course on tariffs against Canada.

And what does Team Carney want me to do?

They want me to abandon my post, remain in Alberta and do absolutely nothing to defend our province.

They want me to cower in the face of eastern media pundits and politicians who favour political grandstanding to effective diplomacy.

I’m fiercely criticized for going into the lion’s den to change the hearts and minds of the very Americans we need on Canada’s side to avoid a trade war with the most powerful economy on Earth.

They want this lady and Alberta to just sit down and shut up.

Well…here is my response to that.

I will not be silent. Alberta will not be silent.

We will not be pushed around and called traitors for merely having the courage to actually do something about our nation’s and province’s predicament other than merely indulging in self-righteous tantrums.

And I for one will never be silenced by the party in Ottawa that has sold out our beloved province for the last 10 years with the help of their NDP collaborators.

I have and will always put Albertans first.

And until this danger to Alberta and our economy is past, they’re going to have to roll me off in a stretcher before I stop fighting for this province and our people.

So call me and my caucus whatever name in the dictionary you want.

As long as Albertans know we’re fighting for them and their families – we could care less what the members opposite or Liberal politicians in Ottawa have to say about us.

Because Albertans expect their Premier and government to always put Albertans first and to lead them through this storm with fearless determination.

As Winston Churchill once said: “Fear is a reaction. Courage is a decision.”

We on this side of the house have made the decision to act with courage…So that Alberta may remain forever strong and free.

Thank-you, Mr. Speaker.

Danielle Smith

Danielle Smith was sworn in as Premier of Alberta and Minister of Intergovernmental Relations on October 11, 2022.

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