Economic Policy in Uncertain Times: Strategies for Canada’s Future

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Canada is facing a set of profound economic challenges. Stagnant productivity, low private investment, and a fragmented domestic market have all contributed to sluggish growth in GDP per capita over the past decade. At the same time, external pressures—most notably the shift in the trade policy of the U.S., which is no longer the reliable ally it once was—underscore the urgency for bold and comprehensive policy reforms. Now, more than ever, Canada needs structural reforms and long-term investment strategies to sustain growth in times of uncertainty.

In this piece, we propose to highlight a series of targeted measures in fiscal policy, project facilitation, and trade integration that can set Canada on a path toward renewed prosperity. But before jumping to our prescriptions, let’s take a lucid look at the state of the Canadian economy and its current challenges.

I. Canada as a Small, Open and Vulnerable Economy

Given the proximity to the United States, the largest and most productive economy in the world, Canada’s economic prospects have become highly vulnerable to U.S. trade policy. Through a series of free-trade agreements dating back to 1988, the stage has been set for deep North American economic integration.

This relationship has been highly beneficial to Canada and its exporters, who enjoyed privileged access to the largest consumption market in the world. As of most recent data, exports account for 30% of Canadian GDP, with 80% of global exports going to the U.S. But underlying this blessing of having close to 25% of Canadian GDP supported by U.S. consumers was a percolating risk: an increasing dependence on a single trading partner.

We don’t know if the recent turn to an adversarial trade relationship will be temporary or consists of the new normal, but the second coming of the protectionist Trump administration demonstrates how badly, and quickly, Canada must reconsider its own policies, both from a trade and a fiscal perspective.

Highlights

• The State of the Canadian Economy: Canada is facing significant economic challenges, including stagnant productivity, low private investment, and a fragmented domestic market. These issues have contributed to sluggish growth in GDP per capita over the past decade.
• Challenges and Pressures: External pressures, such as the shift in U.S. trade policy, and internal issues, like regulatory fragmentation, underscore the need for bold and comprehensive policy reforms. Canada must address these challenges to sustain growth in uncertain times.
• Fiscal Policy Options: Enhancing competitiveness and stimulating investment through fiscal policy reforms is crucial. This includes lowering taxes, rethinking the corporate tax structure, and adjusting tax measures to foster a more attractive environment for investment.
• Streamlining Regulatory Processes: Large-scale projects often face regulatory and administrative hurdles. Streamlining regulatory processes, particularly environmental impact assessments, can reduce approval times for major projects and boost investment and economic activity.
• Reimagining Canadian Domestic and International Trade: Diversifying trade partnerships and reducing dependency on a single market are essential. Liberalizing internal trade and negotiating comprehensive free trade agreements with other countries can help mitigate risks and foster stronger economic integration.

II. Canada’s Productivity: The Lost Decade

For years, Canada has enjoyed robust trade ties—especially with the United States—, as well as booming demography through immigration and a wealth of natural resources that have fueled growth. However, a closer look reveals deeper structural issues.

A well-documented phenomenon in Canada is the weak growth in productivity compared to our southern neighbor. This stagnation in innovation and productivity growth has had a direct impact on GDP per capita, eroding overall prosperity and limiting the fiscal capacity necessary to sustain public services—especially in the face of an aging population.

A key factor behind this productivity slump is the persistently low level of private investment. Since around 2015, Canadian firms have invested less than their global peers in capital projects and new technologies, a trend that not only hampers innovation but also undermines the country’s long-term economic competitiveness.

As global trade tensions rise and uncertainty mounts—and the reality of U.S. tariffs looming large—the need to reverse this trend has become even more pressing.

III. Key Challenges and Pressures

The Canadian economy has multiple things going for it. It is highly attractive to global talents, is rich in natural resources, benefits from high standards of living and benefits from a strong social democratic system. 

But to fully unlock the economic potential of Canada, and set it squarely on the path to prosperity, we believe our governments and regulators should put an immediate focus on tackling three categories of challenges and vulnerabilities.

A. Stagnant Productivity and Insufficient Investment

The link between low investment and sluggish productivity is clear. In Canada, the low growth in private investment has led to a stagnation in the growth of GDP per capita. This is not merely an abstract statistic—it translates into stagnant wealth creation, fewer resources available for public services, infrastructure improvements, and social programs that are crucial in a time of demographic change. Boosting productivity is essential, not only for economic growth but also for maintaining and enhancing the quality of public services.

B. External Trade Pressures and a Shifting Global Order

The international trade environment has grown increasingly volatile. The U.S., once a steadfast partner, now adopts aggressive and transactional trade policies towards its main trading partners.

Canada is not the only country dealing with this new reality. Europe also had to face the same threats and is looking at implementing similar reforms. The Draghi report—widely cited for its call to structural reforms—emphasized that in times of global uncertainty, diversifying trade partnerships and reducing dependency on a single market are not optional, but imperative.

C. Domestic Fragmentation: The Cost of Interprovincial Barriers

While external threats are significant, internal frictions are equally detrimental. Canada’s federal structure, which has long been a source of regional diversity and autonomy, has also resulted in a patchwork of regulations and standards across provinces. This fragmentation not only increases administrative costs and inefficiencies but also undermines the competitiveness of Canadian businesses on the international stage. Harmonizing these diverse regulatory regimes could unlock substantial economic potential by creating a more unified and dynamic domestic market.

IV. Strategic Policy Options

To address these intertwined challenges, we propose a multifaceted strategy focused on three key areas: fiscal policy reform, project facilitation, and trade integration.

A. Fiscal Policy: Enhancing Competitiveness and Stimulating Investment

Canada’s overall tax burden—accounting for 35% of GDP in 2024—is significantly higher than that of many OECD countries and far exceeds the U.S. level of approximately 25%.

The fiscal environment is a critical factor for private investment, as companies weigh the cost of doing business against potential returns. We are convinced that lowering taxes could enhance Canada’s competitiveness. However, any tax reduction must be balanced by careful fiscal consolidation to ensure long-term public finances remain sustainable.

Any fiscal reform involves a rethinking of the corporate tax structure. While the Canadian corporate tax rate is high, it is offset by numerous deductions and credits. According to the C.D. Howe institute and work by the OECD, many of these incentives have not translated into significant productivity gains and may even disincentivize investment in scaling operations. A phased reduction in the base tax rate combined with a progressive elimination of ineffective credits could create a more straightforward, competitive, and growthoriented tax environment—or in other words, a simpler and more efficient fiscal policy.

Furthermore, certain tax measures that have been introduced based on public opinion—such as surtaxes on financial corporations, luxury taxes on high-end goods, and proposed increases in capital gains taxes—risk undermining business confidence. Adjusting these measures to foster a more attractive environment for both domestic and foreign investment is essential.

Concurrently, an increase in defense spending could serve dual purposes: reinforcing Canada’s international credibility and stimulating domestic industries, thereby contributing to broader economic resilience.

B. Facilitating Major Projects: Streamlining Regulatory Processes

Large-scale projects are among the main engines of long-term growth, yet in Canada, they often face insurmountable regulatory and administrative hurdles.

The delays witnessed in projects like the Trans Mountain pipeline expansion, the Contrecoeur terminal upgrade, and the cancellation of initiatives such as Energy-East and LNG Québec are symptomatic of a regulatory framework that is both cumbersome and inconsistent.

One key area for reform is the environmental impact assessment process. While environmental protection is paramount, the current framework has been criticized for its sensitivity and complexity, which significantly escalates the cost and duration of project approvals.

In the spirit of streamlining regulatory reforms, Canada must revisit and recalibrate its project approval processes. The goal should be to strike a better balance between environmental safeguards and the facilitation of critical infrastructure and industrial projects.

One element which we would stress is the need for consistent, predictable regulation. Canadian businesses benefit from having a predictable and simple regulatory environment when making investment and hiring decisions. The prospects of on-again, off-again regulation whenever a new government takes the reins, for example on the environmental front, are not conductive to enhancing Canada’s productivity.

By revising existing legislation and implementing more efficient evaluation processes, Canada can reduce approval times for major projects—from new mines to large-scale manufacturing facilities—thus boosting investment and economic activity.

C. Enhancing Trade Integration: Boosting Domestic and International Commerce

Diversification and a reduction in market concentration are vital for maintaining competitiveness in an era of rapid global change.

Canada’s economic structure is heavily reliant on international trade, but its internal trade framework remains fragmented. Non-tariff barriers (NTBs)— including dairy quotas, trucking regulations, and differing professional licensing requirements—impose significant costs on businesses and consumers. These regulatory inconsistencies hinder labour mobility, limit consumer choice, fragment markets, stifle competition, and constrain economies of scale. In short, the cumulative effects of the barriers have stunted Canada’s productivity growth.

According to a report by the International Monetary Fund, the average tariff-equivalent cost of non- geographic internal barriers in Canada for 2015 was estimated at 21%, with significant variation across provinces and sectors. Services, heavier metals, food products, and manufacturing goods face particularly high barriers, with some sectors experiencing effective rates exceeding 27%. Manitoba, Nova Scotia, and Newfoundland and Labrador are especially affected, exhibiting some of the highest non-geographic trade barriers, even after geographic factors are accounted for.

As a result, interprovincial trade has stagnated since the 1980s, even though international trade volumes have grown significantly. In the early 1980s, the combined volume of interprovincial and international trade (the value of exports and imports combined) accounted for roughly 55% of Canada’s GDP. In contrast, international trade surged, peaking at more than 80% of GDP after the introduction of the Canada-U.S. Free Trade Agreement (1989) and NAFTA (1994).

This growing reliance on international trade has left Canada vulnerable to external shocks, such as tariff threats and shifting trade policies in key markets such as the United States. A greater focus on liberalizing internal trade could mitigate these risks, reducing dependency on volatile external markets and fostering stronger economic integration within Canada.

According to IMF estimates, fully liberalizing internal trade in goods could increase GDP per capita by about 4%, with gains as high as 16% in smaller provinces such as Prince Edward Island. The Atlantic provinces stand to benefit, with projected increases in real GDP per worker of up to 8%. The numbers are significant, given that in 2019 the Bank of Canada estimated an approximately 3% hit to long-run real Canadian GDP in a scenario where the U.S. administration imposes a 25% blanket tariff on all imported goods, and every country in the world (including Canada) retaliates symmetrically.

The IMF report also estimates that liberalization would drive a 15% increase in internal trade volumes as a share of GDP, bringing them back in line with levels last seen in the early 1980s. Employment would be reallocated to provinces with the largest productivity gains, reducing regional disparities and fostering a more balanced economic landscape.

On the international front, Canada’s overreliance on the U.S. market poses a considerable risk, particularly as U.S. policies become more protectionist and inward-focused.

Canada should focus on negotiating comprehensive free trade agreements with countries that offer large internal markets and robust demand for Canadian exports. This diversification will provide a buffer against the uncertainties of U.S. trade policy and help secure a more stable economic future.

Canada’s fragmented internal trade regime contrasts sharply with the more integrated frameworks of countries such as Australia and blocs such as the European Union. Australia’s success in reducing internal trade barriers has been attributed to cooperative federalism whereby the federal and state governments worked together to streamline regulations. The European Union has adopted a more centralized approach, enforcing the free movement of goods and services through legal harmonization and mutualrecognition mechanisms.

These models offer valuable lessons for Canada. A coordinated effort involving federal, provincial, and territorial governments could replicate these successes, building on the existing framework of the 2017 Canadian Free Trade Agreement to tackle the remaining barriers. Strong federal leadership will be essential to harmonize regulations and to ensure all provinces remain committed to liberalization.

In a nutshell, diversifying trade partnerships is essential.

Negotiating new free trade agreements with countries that have large, dynamic internal markets—and that are in need of Canadian products—can help reduce the country’s vulnerability to unilateral policy changes. This might come with sacrifices, for example in sectors that are traditionally protected by supply management systems, such as dairy and poultry, which may need to be gradually exposed to greater international competition to foster innovation and efficiency.

V. Conclusion: A Call to Bold, Coordinated Action

Canada’s economic challenges are multifaceted and deeply intertwined with both domestic inefficiencies and external pressures. Low productivity growth, driven by insufficient private investment and regulatory fragmentation, has left the nation vulnerable in a global environment marked by uncertainty and shifting alliances. At the same time, an overreliance on the U.S. market and the challenges of a heavy fiscal burden have further constrained Canada’s growth potential.

Drawing on insights from Europe’s Draghi report and studies by the C.D. Howe institute and OECD, we advocate for streamlined fiscal policies, structural reforms, and diversified economic strategies. Canada must undertake comprehensive reforms in fiscal policy, facilitate major projects through regulatory streamlining, and enhance both domestic and international trade integration. These measures are not merely about economic survival—they are about positioning Canada as a resilient, competitive, and forward-looking economy in a rapidly changing world.

For policymakers and stakeholders alike, the time to act is now. Bold, coordinated reforms that address both internal inefficiencies and external vulnerabilities can set the stage for renewed productivity, sustained investment, and long-term prosperity.

At IA Global Asset Management, we are committed to supporting initiatives that drive and foster a dynamic economic future for Canada, and we are ready to help in any way we can in these challenging times. And to our precious clients, please don’t hesitate to seek our advice to help you navigate these uncertain times.