December 17, 2018 / 6:30 PM / 5 months ago

Breakingviews - Canada faces off against vampire squid to south

Canada's Prime Minister Justin Trudeau takes part in a question and answer session with youth leaders in Ottawa, Ontario, Canada, February 6, 2017. REUTERS/Chris Wattie

NEW YORK (Reuters Breakingviews) - Canada’s biggest economic threat is sitting across the border. Even though the country managed to salvage a trade deal with its southern neighbor and Mexico in 2018, aggressive economic policies have turned the United States into Canada’s own vampire squid. Forecast GDP growth of 2 percent in 2019 is Prime Minister Justin Trudeau’s to lose.

The first sucker punch has been taxation. President Donald Trump’s generous cuts took the effective U.S. corporate rate 1 point below Canada’s 27 percent in 2018, according to the OECD tax database. That’s not all that motivates corporate investment, but it’s a big consideration. A study by PricewaterhouseCoopers estimated in September that U.S. fiscal policy could put over 635,000 Canadian jobs at risk.

Then there’s energy. Shale oil flowing from America’s south has depressed global prices of its neighbor’s biggest export. While Canada taps its shale too, it has failed to build necessary pipelines, which is why Western Canadian oil trades at roughly half the West Texas Intermediate benchmark. That thwacks petroleum-dependent provinces like Alberta, already running a sizable budget deficit.

Trudeau, whose ruling Liberal Party faces the polls in 2019, is throwing $10.5 billion of corporate tax relief at the problem, but that’s only temporary. A July survey by Canada’s trade finance agency showed one-fifth of exporters are planning to invest abroad – double the share at the end of 2017 – and two-thirds of those plan to do so in the United States.

Besides, Canada’s problems go further back. Its productivity – the GDP squeezed out of each hour worked – has grown just 1 percent a year since 2000, half the rate in the United States, the IMF estimates. Business investment, flat in the United States as a share of GDP in the past four years, has fallen in Canada, according to the Fraser Institute. Those are home-grown problems.

That means there may be home-grown remedies. For starters, Canada is still riddled with barriers to internal trade – pork slaughtered in Prince Edward Island can’t be sold in neighboring New Brunswick, for example. The country offers proportionally more handouts to oil and gas producers than any other G7 country, says the Overseas Development Institute. And it’s not terribly welcoming to foreign investment: Big takeovers still face a “net benefit” test.

In an election year, Trudeau doesn’t need a further drag on the Canadian economy. Maybe that will spur him to do something about it.

Breakingviews

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