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With no will for political union, Canada should consider economic union with the U.S.

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From the Fraser Institute

By Cornelis “Kees” van Kooten

According to an announcement on Friday by White House press secretary Karoline Leavitt, President Dondald Trump will implement a 25 per cent tariff on Canada and Mexico (and a 10 per cent tariff on China) beginning Saturday, Feb. 1.

Over the last few weeks, Canadian policymakers have been rather naïve in responding to Trump’s tariffs threats. They seem not to have figured out what Trump really wants (although perhaps no one knows what he really wants). But the Canadian side has focused on retaliatory measures, lobbying to ensure certain industries are exempt, and an advertising campaign to get consumers to prefer Canadian products—a “Made in Canada” preference.

It’s also been proposed that by lowering trade barriers between provinces, the Canadian economy can offset a trade war with the United States. But this raises the question—why hasn’t this already been done if it leads to such great benefit?

It’s clear that Canadians don’t want to be part of the U.S. However, given Canada’s dependency on the U.S. economy, Canada’s lagging productivity, the inefficiency of separate currencies, and the effect of changes in the Canadian-U.S. exchange rate on prices in Canada, it’s surprising that some kind of economic union with the U.S. is not being considered or even discussed. Or at least it does not appear to be something that politicians north of the border consider.

The post-war European enterprise can serve as a model for how Canada might approach the U.S. In Europe, the Germans remain German, the French remain French and the Dutch remain Dutch. This, despite the fact that the European enterprise has gone well beyond that of economic union. The Maastricht Treaty (1992) created the European Union (EU) by combining the three European Communities—the European Atomic Energy Community, the European Coal and Steel Community and the European Economic Community—into a single entity. While it set the stage for a single currency (the Euro), the Treaty was seen as a first step toward an eventual political union. While the EU has taken large steps toward political union, the enterprise is not going as well as envisioned. The United Kingdom left the EU principally because it did not want to take orders from Brussels. The U.K. was interested in an economic union, but not political union.

The lesson for Canada is clear—we do not want political union, but should be open to economic union with the U.S. This would essentially mean two things. First, eliminating the border with respect to trade in goods and services, and free movement of investment capital. Whether this would include labour would need to be addressed, although economists would argue that, from an efficiency point of view, it should. As a blueprint, one might begin with what’s referred to in Europe as the Schengen Area, which is a group of EU countries that have eliminated all internal border controls and established common entry and exist requirements. This would require that the effective border protects both Canada and the U.S. simultaneously—the northern U.S. border moves to the Pacific, Arctic and Atlantic oceans. If a person qualifies to come to Canada, they automatically qualify to come into the U.S. and vice versa.

Second, monetary union under those circumstances makes a lot of sense. It would be simple to implement. For example, we might say that one Canadian dollar is on par with one U.S. dollar, or that it’s equal to US0.85 or 0.90. The exact value is less important as wages and other costs will adjust with increases in Canadian productivity that will then lead to increases in wages.

Finally, Trump insists that Canada commit 2 per cent of its GDP to defence. I would argue that, given a willingness to negotiate an economic union, and a commitment to increase defence spending to meet the 2 per cent target by 2030, would be sufficient to remove the Trumpian tariffs.

By agreeing to negotiate an economic union, Canada may convince the Trump administration to remove the tariffs. If an economic union were a threat to Canada’s viability, to our Dominion, then we do not deserve to be Canadian. I would venture that our national identity vis-à-vis the U.S. is strong enough to survive an economic union.

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Cornelis “Kees” van Kooten

Professor of Economics, University of Victoria
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Alberta

Alberta government should rely on dividends—not ‘political will’—to grow Heritage Fund

Published on February 1, 2025

By

From the Fraser Institute

By Tegan Hill

The Smith government on Wednesday released its plan to grow Alberta’s Heritage Fund to at least $250 billion over the next 25 years, mainly by reinvesting all investment returns back into the fund. But even Smith recognizes her plan will “take political will over a long period of time.” Of course, political will is subjective and can change from government to government. If Smith wants to establish a sustainable plan to grow the Heritage Fund, it should pay dividends to Albertans.

First, some quick history. When the Alberta government created the Heritage Fund in 1976, it established a rule that the government must deposit 30 per cent of resource revenue (including oil and gas royalties) into the fund annually. That quickly fell to 15 per cent by 1982/83, and after an oil price collapse the government eliminated the requirement in 1986/87. Since then, governments have routinely failed to make deposits into the fund, the fund’s value (after accounting for inflation) has eroded over time, and governments have spent nearly all of the fund’s earnings. Consequently, this fiscal year the fund will be worth less than $26 billion.

In other words, political will hasn’t been a successful strategy in growing the Heritage Fund.

Which brings us back to dividends. Here’s where Alberta can learn from Alaska. Alaska’s resource revenue savings fund (the Permanent Fund) was also created in 1976, but is now worth about US$80 billion (roughly CA$115 billion). What does the Alaska government do differently?

While various rules contribute to the fund’s success, the dividend rule is arguably the most critical. The Alaskan government pays a share of the fund’s earnings to Alaskan citizens via a dividend each year. Crucially, this gives citizens an ownership share in the fund. And therein lies the political will for governments to responsibly grow and maintain the fund. Any government that tried to use the fund for irresponsible purposes (e.g. raid the fund to spend money elsewhere) would likely face the wrath of Alaskan voters, given their understandable attachment to the dividend cheques.

Indeed, while the Alaskan government can reduce or eliminate the annual dividend, it has consistently allocated funds to the dividend for more than 40 years, even though this reduces the amount of money available for government spending. Overall, the fund has paid out more than US$30 billion to Alaskan citizens via dividends. Last year, each Alaskan received US$1,702.

According to its plan released on Wednesday, the Smith government will rely on “political will” to grow the Heritage Fund. But that’s not a recipe for success. Instead, the Smith government should learn from Alaska’s success and start paying dividends to Albertans who will provide the political pressure necessary to grow the fund over the long term.

Tegan Hill

Director, Alberta Policy, Fraser Institute
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Business

Canadians should understand costs of Ottawa’s Emissions Reduction Plan

Published on February 1, 2025

By

From the Fraser Institute

By Julio Mejía and Elmira Aliakbari

On its first day in office, the Trump administration withdrew from the Paris climate agreement and began a regulation effort aimed largely at the energy sector. Meanwhile, the Trudeau government wants to reduce Canada’s greenhouse gas (GHG) emissions by at least 40 per cent below 2005 levels by 2030 to satisfy its commitment to the Paris agreement that Trudeau signed back in 2016.

But far from “building a strong economy” and making Canada “more competitive,” as the government  claims, its Emissions Reduction Plan (ERP) will hurt Canada’s already struggling economy while failing to meet its own emission reduction targets.

In essence, the ERP has two components. The first one, and probably the most well-known to Canadians, is the carbon tax, which places a cost on fossil fuel use based on the amount of GHG emissions produced. The tax increased to $80 per tonne on April 1, 2024 and is scheduled to reach $170 per tonne by 2030.

The second—and least discussed—ERP component is the Trudeau government’s cascade of regulatory measures and mandates including requirements for fuel producers and importers to reduce the carbon content of their fuels, and electric vehicle mandates that require all new (light-duty) vehicles sold to be zero-emission by 2035 (with interim targets of 20 per cent by 2026 and 60 per cent by 2030). Additional measures include restrictions on fertilizer use in agriculture, emissions caps in the oil and gas industry, energy efficiency mandates for buildings, and more. With more regulations come increased costs to producers, and these costs are largely passed to consumers in the form of higher prices.

But aside from vague and unsupported claims that the ERP will strengthen the economy, the government hasn’t provided a detailed assessment of the plan’s costs and benefits. In other words, while the government has outlined how it plans to reduce emissions—carbon taxes, regulations, mandates—we still don’t know how much these policies will cost or how they will benefit Canadians.

But a recent study published by the Fraser Institute evaluate the economic and environmental impacts of the ERP.

According to the study’s projections, the carbon tax alone will cost $1,302 per worker annually by 2030, reduce employment by an estimated 57,000 jobs, and shrink the Canadian economy by 1.5 per cent compared to a scenario without the ERP. Considering that the economy grew just by 1.3 per cent in 2023, this cost is significant.

After you account for the ERP’s additional regulatory measures and mandates, the economic cost rises. By 2030, the full implementation of the ERP—which includes the carbon tax, regulatory measures and mandates—will shrink the economy by 6.2 per cent, cost Canadian workers $6,700 annually, and reduce employment by 164,000 jobs. Alberta, of course, will bear a large portion of these costs.

To make matters worse, the ERP will still fall short of the Trudeau government’s 2030 emission-reduction target. According to the study, the ERP will reduce Canada’s GHG emissions by about 26.5 per cent between 2019 and 2030, achieving only approximately 57 per cent of the government’s target. In short, Trudeau’s climate plan won’t deliver the economic growth or environmental impact the government anticipates.

Canadians should understand the costs of the Trudeau government’s Emissions Reduction Plan (ERP), which won’t achieve its targets while making Canadians worse-off. Any government should reject climate targets and policies where Canadians are merely an afterthought.

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