Canada’s Relationship with the United States Is not the Problem, It Is the Solution

Warning lights are Already Flashing

Alternatively, nations with abundant natural resources have often squandered their wealth and opportunity. Look at Argentina and Venezuela for example, both are rich in natural resources and have educated populations, yet both ran their economies into the ground. Runaway inflation, falling living standards, and rising poverty are unmistakable harbingers of such collapses. (Argentina’s new Milei government is getting that country back on track but they must dig themselves out of a very deep hole and recovery will take time.)

How did these rich countries wreck their economies? Poor policies and inept governance, overreliance on the state, excessive taxation, excessive social spending, overregulation of industry and, finally, blatant corruption. Poor governance, when piled layer upon layer, year after year, can shatter even the wealthiest of nations. Canada take note.

Perhaps it’s time we stopped shouting at one another and put aside politics for a moment and instead focus on the numbers which represents a form of harsh truth. Over the last ten years Canada has significantly underperformed relative to the US by every important economic measure. We are getting demonstrably poorer than our southern neighbor by just about every metric. Foreign direct investment has nearly collapsed even as Canada’s own capital has flowed abroad in search of returns. Even the Canada Pension Plan has reduced the percentage of its capital invested in Canada from 24% in 2015 to near 12% in 2024. This represents a breathtaking shift in capital away from Canada and from our own pension trust fund. This parallels a comparable shift in Canadian capital of about a trillion dollars over just ten years…and this against a GDP of about 2.2 trillion dollars. Foreign Direct Investment from abroad has also collapsed at a rate of 60-80 billion dollars a year. These numbers are devastating given the link between investment and productivity. Investments today lead to productivity tomorrow—the two are symbiotic.[1] The only exception to this rule appears to be investments driven by insanely low interest rates (free money) or Government trophy projects like China’s new cities without people.[2]

Canada’s per capita GDP, the surest measure of living standards, has been flat or declining for a decade. The Fraser Institute projects Canada’s average annual growth measured in GDP per capita to be the lowest among 30 OECD countries. [3]

Don’t forget this havoc occurred long before President Trump imposed any additional tariffs on Canada. Let that truth sink in. Meanwhile, the US is growing economically and Canada is not, so the economic gap will only grow.

You can quibble with these economic comparisons, but the bottom line is that Canada is getting poorer every year…and average Canadians are noticing. Food and housing prices are skyrocketing, food bank usage exploding and homelessness heartbreakingly common. These numbers, reflected in cold OECD statistics, play out daily on a human level in households across the country. Young Canadians today cannot hope to own a home in any major urban center in Canada. Unsurprisingly, young voters are the group most dissatisfied with Canada as they bear the brunt of the country’s declining employment and affordability.

So, What Went Wrong?

Let’s start with hubris. A country that has always been wealthy relative to the rest of the world and where each generation expected to live better than their parents can easily become complacent. Everyone assumes no matter what policy battering is inflicted on the economy it will be absorbed and somehow the economy will keep growing. This is especially true when it comes to investment. Over the past ten years, Canada has gone out of its way to scare off investment. Layer upon layer of restrictive policies and regulations made Canada a difficult place to invest. Rules were not just restrictive but often fickle with goal posts moving even after projects were underway and money spent. Nothing scares away investment more than uncertainty. Investors can cope with difficult environments so long as the rules are clear and stable but once uncertainty appears wallets freeze up.

Growth of government at all levels has contributed to the problem. The Federal Civil Service has grown by a third over the past decade and no one would suggest it is a third more effective than a ten years ago. Many would argue the opposite. It is not just bureaucracy at a national level that gums up the works but regulators at the provincial and local level. According to the CD Howe Institute, regulations, approvals, and permitting account for as much as 20% or more of the cost of new construction in Canada.[4] And never forget that delays represent a cost. If you think this only applies to new housing consider the impact on proposed megaprojects such as pipelines, gas lines, highways, and bridges. Canada has created a suffocating regulatory environment where the constituencies that can say no to a project far outnumber those who can say yes. In Canada just about everybody has a veto.

We can’t seem to get anything built in Canada anymore and no wonder. During World War Two, Canada went from a navy of 13 decrepit ships to the third largest navy in the world with over 400 vessels. From a standing start Canada produced nearly a million military vehicles, 16,500 aircraft, and trained an astonishing 131,000 pilots and aircrew. That would be impossible today. Someone somewhere would say no. [5]

Canada has turned its back on its enormous natural resources including oil, gas and minerals. Ideology has supplanted common sense when it comes to our abundant natural resources. At worst this has metastasized into outright hostility to the God-given bounty Canada has under its feet. Even when foreign allies seek Canadian resources, they were often turned away with the specious excuse there is “no business case.” When you have a valuable product and a customer willing to buy it, that is the very essence of a business case.

Canada also faces a political and constitutional crisis. The Canadian parliamentary system was designed to concentrate power where the most votes are found, i.e., in and around Montreal and Southern Ontario. This is where Canadian governments are elected, often long before the polls close in western Canada. The electoral balance in Canada has remained unchanged but the economic balance has shifted dramatically. Today, the two richest provinces in Canada (based on per capita income) are Alberta and Saskatchewan, not Ontario and Quebec. This problem could have been ameliorated with an elected Senate designed to protect regional interests, much like in the United States, but the opportunity was missed. Instead, the Senate became a backwater of political appointments and sinecures.

The west is where much of Canada’s oil, gas, minerals, and agriculture are located. The bottom line is that economic power has shifted west but political power remains firmly anchored in the center. The sad truth is that too much of the electorate in central Canada view western Canada as a far away appendage that funds transfer payments but complains too much. It is a noisy colony. None of this bodes well for the future.

The Way Out—A New Grand Bargain

There is a way out, but the aperture is fast closing. It will require a significant shift in thinking. This is where our paradox enters. Today’s politics and headlines are dominated by a compulsive, almost obsessive focus on President Donald Trump. This drumbeat was made worse by an election season where everyone tried to outdo themselves in opposing Trump. It was all sound and fury signifying nothing as the economic numbers proved immutable. Our economy is inextricably linked to our southern neighbor, like it or not. We share a 9,000 km long border with the US and 90% of Canadians live within a few hours of that border. Seventy-five percent of Canada’s trade is done with the US. Stronger efforts should have been made to diversify trade east and west but that would have involved significant investment in roads, rail, and especially ports. With a few exceptions, like Prince Rupert (vehemently opposed by Vancouver), these investments have not been made. The very industries needed to drive diversification like oil and gas have been under attack from Ottawa for environmental reasons. This is changing but we are already ten years behind. Assuming we are successful in building the needed infrastructure, it is unlikely we can do more than reduce our dependence on US markets on the margin, from perhaps 75% to 65% of our trade. This means shifting about 150 billion dollars in trade annually, no small matter but possible if we invest in the necessary transportation infrastructure. But what then?

We would still find ourselves economically tethered to the United States for the bulk of our trade. Maybe it’s time we flipped the trade paradigm on its head and asked why it is such a bad thing to have the US as our largest trading partner. Would you rather Russia or China be our superpower neighbor? Just ask Ukraine, Hong Kong or Tibet how that works out. Being a trading partner with the largest, most dynamic market on Earth is hardly a burden. Let’s shift thinking to how we take advantage of this incredible access. Is it possible that leveraging our access to American markets rather than moving away from them might be the correct course of action?

Is it possible the correct policy is to further integrate our two economies rather than separating them? This doesn’t mean becoming the 51^st state but it would mean moving toward a common market, harmonizing rules, regulations, and tariffs. This would entail creating a true North American economy. This could be accompanied by a commitment to common defense, especially in the Arctic, perhaps through an extension of NORAD. In the Arctic, both the United States and Canada are operating from a deficit in projecting sovereignty. Russia is well ahead with China fast catching up. It would take both Canada and the US working together to construct the bases, ships, icebreakers, submarines, and supporting infrastructure needed and even then, it would take a decade. A common market and common defense might just be the sort of grand bargain the US Ambassador to Canada recently hinted at in terms of trade talks.

Canada’s vast energy and mineral resources could be fully developed under this scenario allowing Canada to leverage its energy potential aggressively, including oil, gas, and offshore wind. Prime Minister Carney has talked about Canada as an energy superpower and it’s a powerful idea. Canada has already established its leadership in clean, ethical oil and gas development.[6] Canada has long been a leader in nuclear technology and hydro development and is about to emerge as a leader in offshore wind development. If there is any country able to tackle the issue of dirty Rare Earth Processing and safe nuclear waste storage it is Canada. That is how we become an energy superpower.

As for pipelines, we should be looking to build not one but several including reactivating Keystone. We will need to invest more in rail, road, and especially ports. The latter is particularly important and long overdue. Consider that maritime Canada sits on significant deposits of strategic minerals but has no port capacity to ship bulk cargo. This leaves these valuable assets stranded and undeveloped. At the same time, rail lines in Atlantic Canada have been steadily decommissioned over recent years. We have been moving backwards not forwards.

What is the upside of moving to a common market and becoming an energy superpower? There is a host of studies based on the experience of European and other regions entering common markets and the numbers are stunning.[7] As it applies to Canada, a common market would raise long-term GDP by as much as 1-3% especially if free movement of labor were included. This amounts to roughly 34 billion dollars a year or a third of a trillion dollars over ten years. This is hardly chump change. Most importantly, it opens the door to increased capital investment which Canada desperately needs. By the 20^th year it would facilitate: A substantial rise in national wealth.

•  A shift toward a higher-productivity, higher-income economy
• Stronger global competitiveness
• Dramatic increase Energy production
• A meaningful reduction in poverty[8]

It would also allow for major health care expansion, greater investment in infrastructure (transit, ports, energy grids), education, R & D, housing, and debt reduction.

But the transition will not be without pain. Among the oxen to be gored would be supply management, energy regulations, cultural (CanCon) rules, banking and financial regulations, shipping regulations, and interprovincial trade barriers. Tax rates would also come under pressure to harmonize as labor and capital would be free to pursue opportunities in lower tax constituencies. Military spending would have to increase but that is already underway in Canada. There is no free lunch. Even good things come with a cost.

There is today’s truth turned on its head to get attention. A different way of looking at the problem or should I say opportunity?

Footnotes:

[1] Empirical Economics, 26 Apr 2012 Linking Investment Spikes and Productivity Growth, OECD Economics Department June 2016, Link Between Weak Investment and slowdown in Productivity, Measuring Multifactor Productivity growth, OECD, Oct 2007

[2] Low Interest Rates and Risk‑Taking: Evidence from the U.S. Syndicated Loan Market (Aramonte, Lee & Stebunovs, 2015), Low Interest Rates, Capital Misallocation and Welfare (Dosis, 2025), Wasted cities in urbanizing China, He, G., Mol, A. P. J., & Lu, Y. (2016). Wasted cities in urbanizing China. Environmental Development, 2-13. [18]. DOI: 10.1016/j.envdev.2015.12.003

[3] https://www.rbcbank.com/assets..., OECD Economic Survey Canada 2025, Fraser Institute, July 19, 2014, Canada living standards falling behind rest of developed world,

[4] Buyers Beware: The Cost of Barriers to Building Housing in Canadian Cities (May 2023), Authors: Benjamin Dachis (C.D. Howe)

[5] Veterans Affairs Canada. War Production – Materials for War. Government of Canada.https://veterans.gc.ca/en/reme...

[6] World Bank governance indicators) and concludes that Canada ranks #1 among the world’s top oil-reserve countries in environmental policy, social progress and governance. Large-scale decarbonisation projects in the oil sands. Canada’s Pathway Alliance, six companies representing ~95% of oil sands production – has a public goal of net-zero emissions by 2050 from their operations. Their flagship proposal is one of the world’s largest planned CCS systems a C$16–16.5 billion carbon capture and storage network in northern Alberta, linking 13–20 oil sands facilities via 400+ km of pipeline to a storage hub near Cold Lake. Certainly, in the area of carbon capture Canada is a world leader.

[7] 1. Trade Volumes Increase 20–100%

Studies of common markets consistently find large boosts to bilateral trade:

EU membership increased trade between members by 30–100% (depending on methods).

The EU Single Market program (post-1993) is associated with ~20–30% higher intra-EU trade than would have occurred otherwise.

Trade creation is especially strong when initial tariffs were high.

Why?

Removal of tariffs

Harmonized product standards

Free movement of goods, capital, labor

Lower transaction costs

1. GDP Levels Rise by 1–10% in the Long Run

2. Most cases show modest but meaningful increases in GDP

Core macro-economic studies.

In ’t Veld, J. (2019). Quantifying the Economic Effects of the EU Single Market. European Commission.

Pelkmans, J. (2024). Empowering the Single Market. CEPS.

Micro-economic & trade studies
Cernat, L. et al. (2019). The economic benefits of the EU Single Market in goods. Structural Change and Economic Dynamics.

Welfare gains
Bertelsmann Stiftung (2019). Estimating Economic Benefits of the Single Market for European Welfare.

Regulatory and trade-flow evidence
Kommerskollegium (2015). Economic Effects of the European Single Market.

Productivity & integration
OECD (2025). Economic Survey of the European Union and Euro Area.

Policy-summary evidence
ASMR (2023) – European Commission’s Annual Single Market Report

[8] Madanmohan Ghosh & Someshwar Rao (2004/2005) simulate a Canada–US customs union with harmonized external tariffs and elimination of NAFTA rules of origin, using a dynamic CGE model (GTAP-based).Evangelia Papadaki et al. (Statistics Canada / International Trade Canada) build a CGE model with: 24 sectors, 6 Canadian regions, US, and Rest of World.

Le Monde, EU accession has boosted growth among its new members.

A new report points out that per capita wealth of the 10 countries that joined the European Union in 2004 has risen from 14% to 50% that of Germany in 20 years.

Official Website European Union, 20 years together: Facts and figures about the benefits of the enlargement for the EU