From the Fraser Institute

By Steven Globerman and Lawrence Schembri

The Bank of Canada’s decision last week to lower its policy rate by 50 basis points increases the gap between the U.S. Federal Reserve’s policy rate and the Bank of Canada’s rate to approximately 130 basis points. While this gap might close somewhat if the Federal Reserve lowers its rate at its meeting this week, a substantial U.S. premium will still exist.

Since borrowing rates are tied to policy rates, interest rates in Canada will remain well below those in the U.S. for the foreseeable future. This gap will continue to put downward pressure on the value of the Canadian dollar against the U.S. greenback, as investors favour higher-earning U.S. dollar-denominated assets over Canadian dollar assets. President-elect Trump’s threatened trade actions against Canada could also exert further downward pressure on the loonie, especially if the Bank of Canada responds to Trump’s actions by making additional rate cuts. For context, it took $1.33 Canadian dollars to purchase one U.S. dollar on January 1, 2024, compared to $1.43 Canadian dollars on December 13, 2024. This represents a substantial depreciation in the Canadian dollar’s value of approximately 7.6 per cent over the period.

What effects will a declining Canadian dollar have on the Canadian economy?

In short, it will increase demand for domestic output and labour and put upward pressure on inflation via higher import prices, and it could also lower productivity growth and further hurt living standards.

Why the impact on productivity?

Because Canada imports most of its machinery and equipment (including information and communications technology) from the U.S. and other countries, and investment in this type of physical capital helps drive productivity growth. A declining Canadian dollar makes capital equipment imports more expensive, thereby discouraging investment and slowing productivity growth. A declining Canadian dollar may also shelter domestic firms from foreign competition, which could dampen their incentive to invest in productivity-enhancing assets, even if they price their output in U.S. dollars.

Hence, if the Canadian dollar remains weak against the U.S. dollar and other currencies, it may be more difficult to reverse Canada’s productivity woes. Again, productivity—the amount of GDP per hour of labour the economy produces—is key to improving living standards, which have been on the decline in Canada. From July to September of 2024, the economy grew by 0.3 per cent yet per-person GDP (an indicator of living standards) fell by 0.4 per cent (after adjusting for inflation).

Canada also indirectly imports technology via direct investments made by U.S.-based companies in their Canadian subsidiaries. While a declining Canadian dollar makes it cheaper for U.S. companies to buy assets in Canada, it also reduces the U.S. dollar value of profits earned over time in Canada by American-owned companies. This phenomenon, combined with an unstable Canadian dollar, might discourage inward foreign direct investment and associated technology transfers by increasing the financial uncertainty of such investment.

To be clear, this is not a criticism of the Bank of Canada’s move last week to help lower domestic interest rates given the Bank’s primary mandate to meet its inflation rate target of 2 per cent. Rather, governments—including the Trudeau government—must enact policies to encourage business investment in productivity-enhancing assets.

For starters, policymakers should reduce business tax rates and the tax rate on capital gains, to encourage innovation and entrepreneurship. They should also dramatically reduce the regulatory burden and other barriers to entry and growth, especially those faced by small and medium-sized businesses. And the federal and provincial governments should increase competition in the domestic economy by reducing interprovincial trade barriers.

For example, the provinces could adopt a policy of “mutual recognition” so the standards and licencing requirements in one province would be accepted by all provinces. Provinces can also unilaterally eliminate self-imposed trade barriers (as Alberta did in 2019 with grazing permits for livestock). Of course, due to resistance from special interest groups that benefit from internal barriers, such reforms will not be easy. But the economic risks to the Canadian economy—from even the threat of a trade war with the U.S.—could generate support among Canadians for these reforms. Indeed, reducing interprovincial barriers to trade and labour mobility might be the single most important thing that governments in Canada could do to improve productivity.

With Canada’s lower inflation rate, weaker labour market and weaker economic growth outlook compared to the U.S., lower interest rates in Canada seem appropriate. Bank of Canada Governor Tiff Macklem wants to see economic activity pick up to absorb slack in the economy and prevent inflation settling below the bank’s 2 per cent target. Clearly, the Bank should focus on inflation and domestic economic conditions. But policymakers must do their part to create a better environment for investment and innovation, the keys to productivity and increased living standards for Canadians.

Steven Globerman

Senior Fellow and Addington Chair in Measurement, Fraser Institute

Lawrence Schembri

Senior Fellow, Fraser Institute

From the Frontier Centre for Public Policy

By Marco Navarro-Genie

Diplomacy is often a world of planned whispers and subtle signals to communicate complex messages. So, even sleepy folks noticed when the PM made a much-publicized bold (and seemingly impromptu) move and flew to Florida to play Trump-Whisperer. What was the PM hoping to get from that appearance? The best way to evaluate such diplomatic moves is to measure results against expectations.

From start to finish, the trip read like Trump’s move, when the president flew in a similarly bold and unanticipated fashion to pacify the leader of North Korea, Kim Jong-un –the “Little Rocketman.” Trudeau’s trip to see Trump was modelled on Trump’s Korean trip; it was an attempt to out-Trump Trump. That was the expectation.

Amid talk of nuclear weapons deployment, Trump surprised the world in 2017 by going to North Korea to meet with the leader of the most insular country on the planet, a man the traditional media painted as an irrational lunatic. That is not unlike the image of Donald Trump that CBC and the MSM chorus in Canada present.

Similarly, Prime Minister Justin Trudeau surprised his followers and detractors, by flying to Mar-a-Lago, the capital of Trump’s world. The purpose was not to avoid a thermonuclear war but a trade war between the two countries. Such a trade war would hurt both countries but could devastate the “vibecessing” Canadian economy, which the Trudeau government is desperately trying to perk up expecting a general election in months.

The news was leaked once the Prime Minister was in the air heading south. A flood of commentators, who pretended to have no authority to speak on the subject, began to discuss what the trip meant and how brave and bold, silly or foolish, the Prime Minister was for undertaking it. This was like the attention surrounding Trump’s journey to North Korea.

The most surprising aspect of the announcement was that Trump had previously mocked and ridiculed the North Korean leader. While we don’t have direct insight into what the North Koreans called Trump at the other end, it was probably far from flattering. Consequently, it was hard to imagine how their interactions would play out. Many argued that the two men had nothing in common, often expressing this with professorial certainty.

There is no evidence that Prime Minister Trudeau has ever called Trump any nasty names in public, but Trump has not been as careful. After the G7 meeting in 2018, Trump referred to Trudeau as being “weak and dishonest.” However, we do know that Justin’s favourite boogeyman is the American “extreme-right,” of which progressive Canadians think Trump is the godfather. Whatever Trudeau and prominent government ministers think of Trump conservatives, they also think of Trump. There are many examples of how government members weaponized the concept. In October 2024, Deputy Prime Minister Chrystia Freeland addressed criticisms from Conservative MPs by stating she wasn’t intimidated by “juvenile playground insults from the wannabe MAGA maple syrup Conservatives.” Similarly, amid discussions about Prime Minister Trudeau’s leadership in October 2024, some government members referred to Conservative Leader Pierre Poilievre as “Maple MAGA” or “Canada’s Donald Trump,” expressing platitudes about threats to democracy. Readers might also recall how every lieutenant in the Trudeau legions pretended MAGA Trumpeteers and Trump himself had crushed Roe v. Wade and then claimed Canada’s Conservatives would do the same.

The PM, too, indulged in the same kind of attack during a July 2023 visit to the Baitun Nur Mosque in Calgary. During the event, Trudeau addressed concerns among the Muslim community regarding his support for the Transexual agenda and the claims of inclusive education in schools. He quickly invoked the anti-American narrative, shaming the man who posed the question for accepting what Trudeau labelled as radical right-wing American propaganda. Trudeau suggested that misinformation about Canada’s sexual education curriculum was being propagated by “the American right-wing,” which he argued was causing unnecessary division and fear among Canadians.

Many people were surprised to see Trump attempting what others had never tried in North Korea. That reaction was akin to that of Canadians who knew what Trudeau and his cabinet had said about Donald Trump and the American right. For Prime Minister Trudeau it was a victory to show pictures of his foray into Trumpian Mordor, giving him the chance to appoint himself the hero who will stop the detonation of a 20 percent tariffs trade bomb.

Immediately following the US election, the Trudeau cabinet quickly backtracked on the Trump insults. They suddenly forgot how they were presenting Trump as the figure behind Pierre Poilievre and his “extreme right-wing politics.” This was done with the same enthusiasm that Trudeau’s critics summon when joking about his supposed genetic connection to Fidel Castro.

Trump’s visit to North Korea reduced some of the heated rhetoric between the two countries; however, the North Korean Stalinist regime remains intact, along with its nuclear capabilities. Trump and Kim Jong-un did not sign any treaty to regulate nuclear weapons or establish lasting peace between their nations. Similarly, Prime Minister Trudeau returned from Florida without any significant outcomes.

There was no joint statement or announcement of an agreement. There were promises to continue discussions, which does not constitute a victory. All Trudeau can claim is a public relations victory like the one Trump touted after his return from North Korea, and that is not insignificant. But showing that Trump was not mean to him is hardly a diplomatic victory.

Trump provided Trudeau with opportunities for photo sessions without conceding anything or making any promises. He maintained his firm demand that Canada strengthen its border security to prevent drugs and potential terrorists from crossing freely. Trump takes satisfaction in the fact that a man he despises travelled to plead with him for leniency regarding his tariff threats. He is fully aware of this dynamic.

Prime Minister Trudeau may portray himself as someone who understands Trump well, but Trump holds the upper hand. He knows Trudeau is “weak” and desperately desires to maintain himself in power, despite his low popularity. Furthermore, Trump understands that Trudeau is willing to make significant political sacrifices to achieve a seemingly favourable resolution to the border issues. Trudeau badly needs a win, and Trump knows that Trudeau is willing to jeopardize his country’s economy to win. Consequently, Trump will likely capitalize on Trudeau’s vulnerabilities for all they are worth.

Trump understands that Trudeau is the ideal Canadian leader to engage with him, which should make Trudeau the least suitable person to negotiate with Trump if Canada’s interests are to be protected.

From that perspective, Trudeau’s trip to Florida is unlike Trump’s trip to North Korea. While both leaders sought to leverage their trips for political and public relations gains, the outcomes reveal the limitations of symbolic diplomacy and Trudeau’s inability to turn the trip into a long-term win. The latter is as much a function of the PM’s lack of skill as it is of the perception among voters that he is veritably done, no matter what.

Prime Minister Trudeau believes he is the only one who can deal with Trump from a position of strength, which is incorrect. His government has gimmicks but no strength left. That is why the prime minister pleads for a Team Canada approach to Trump and quickly condemns skepticism of his abilities as a national betrayal.

Trump will take advantage of that weakness –and if he can nail a man he despises as weak and woke, he will enjoy it the more.  Out-Trumping Trump for domestic advantage was a fool’s errand.

Marco Navarro-Genie is VP Policy and Research at the Frontier Centre for Public Policy. He is co-author, with Barry Cooper, of COVID-19: The Politics of a Pandemic Moral Panic (2020).