When You Come to a Fork in the Road, Take It

The unpredictability of US economic policy under the Trump administration has led to extreme volatility in financial markets and heightened uncertainty among households and businesses. Despite the 90‑day reprieve from “reciprocal” US tariffs except for an across‑the‑board 10% duty on all goods imported to the US, America’s largest trading partners aren’t out of the woods yet. In the ever‑escalating tit‑for‑tat trade war between the US and China, US imports of Chinese goods are now hit with a 145% tariff (except for select electronics temporarily). Chinese authorities have responded in kind. That’s going to disproportionately hurt America’s most successful companies, and it’s showing up in their valuations. These tariffs are also going to massively disrupt international trade, exacerbating a global economic slowdown and raising the risk of a worldwide recession originating from the planet’s two largest economies. Commodities have fallen sharply on concerns of slower global demand, but this may be just the canary in the coal mine.

So where does that leave Canada in all of this? Unfortunately, it’s left taking economic hits from all sides. First, there’s the 25% US import tariffs on steel, aluminum, select aspects of autos and anything that isn’t USMCA compliant (albeit 10% on energy and potash). Then, there’s the further drag on growth from retaliatory tariffs, the inflationary impact of which is likely to leave the Bank of Canada (BoC) more reluctant than it would be otherwise to cut interest rates as deeply as it has in past recessions. Lower commodity prices will offset some of this inflationary bump, as will the elimination of the price on pollution External link., although lower oil prices will drag down growth even further. Altogether, this will probably put the investment and hiring plans of businesses on ice for the foreseeable future. The BoC’s Business Outlook Survey indicates as much. All of this points to a weaker labour market ahead. And when combined with the lower value of household savings in financial assets, this could keep Canadian households on the sidelines when it comes to spending money and buying a home. By definition, Canada’s economy could experience a US‑policy‑induced recession in the coming quarters—a view corroborated by the Bank of Canada’s most recent Monetary Policy Report.

Canada is at a crossroads. Growth has slowed since oil prices dropped precipitously a decade ago and foreign direct investment dried up as a result. Despite the best of intentions, subsequent policy initiatives to boost investment in things like advanced manufacturing and artificial intelligence didn’t translate into tangible increases in investment, productivity, real GDP per capita or living standards for Canadians.

There is an active conversation about the direction Canada should take when it comes to economic policy. Prominent proposals being discussed include supporting not just small companies in early days of starting up, but also the more mature stage of scaling up. To help do that, research External link. tells us taxes on capital should probably be lower, not higher. Regulations should be targeted and as minimal as needed to achieve the goals they’re designed to accomplish. This shouldn’t just apply to resource projects, but the barriers to internal trade within Canada and international trade with countries other than the US as well. Public investment should be directed toward tangible investments in trade‑supporting infrastructure like roads, rail, ports and airports. It’s even better if some of those can qualify as defence spending External link. to meet our 2% of GDP NATO target. There should be dramatically more openness to accepting investment from the long‑term, stable capital of institutional investors as well, particularly Canadian pension funds. At the same time, our immigration system should be open to accepting the most talented people on the planet who want to live and work here. Improving access to affordable housing and skills training to support a more flexible labour force would further enhance Canada’s long‑run economic potential. And all of this should be accompanied by a credible plan to return to a balanced budget. Creating a growth‑friendly environment requires ensuring the fiscal capacity to support social programs and meet demographic challenges.

As Yogi Berra once famously said, “When you come to a fork in the road, take it.” The erratic and antagonistic policies of the Trump administration have taken Canada to that fork in the road. We now have no choice but to take it, and should do so in earnest.