Now that the trade war has entered a new phase, it is time for Canada to respond with force. But not a tit-for-tat tariff game, which will only undermine the domestic consumer more than is already the case.
Of course, the domestic manufacturing base must be protected, and a tariff on U.S.-made autos and parts would help in that regard, but would also be inflationary, and one could reasonably expect President Donald Trump to retaliate. A small, open economy that still depends critically on the United States can only lose in this scenario.
What Canada still has to do is prevent a flight of capital out of the country, which would deplete the manufacturing base and trigger permanent job losses. There is another way to respond without poking the U.S. in the eye. And that is to take advantage of the relative strength Canada enjoys in its fiscal finances, having refrained from all the budgetary largess that has kept the U.S. Energizer Bunny going since the pandemic’s worst days.
Canada does have more budgetary muscle, and if it gets a majority government in the April 28 election, action can be taken far quicker than is the case south of the border, where fiscal policy continues to be held up in a deeply divided Congress. While it is laudable to think big on the spending side and revamp Canada’s dilapidated infrastructure, nurture expansion in intellectual product assets, and focus on development in the critical minerals space, these things take time.
What does not take time and can immediately offset U.S. trade actions and negate corporate decisions to relocate production facilities south of the border is a bold and ambitious plan to cut top marginal tax rates right across the board: personal, corporate, and capital gains.
It may come as a surprise to some that a good chunk of this could be funded by raising the Goods and Services Tax (GST) – that comes at the expense of consumer spending, but the payback from higher investment and job creation will act as a very strong antidote.
The campaign to encourage Canadians to “Buy Canada” and willingly change their travel plans to domestic locales from U.S. destinations is without precedent. Whoever leads the country after the coming election should be taking their cue from former prime minister Brian Mulroney’s 1984 campaign and educate Canadians on the benefits of fundamental tax reform. Tax consumption and relieve the burden on incomes, investment, and job creation. Who exactly wouldn’t want that trade?
Bringing top marginal rates on business income and capital gains to below U.S. levels is the most effective way to fight this “made-in-USA” trade war.
How would Mr. Trump retaliate against a broadly based Canadian tax cut? That is one thing he couldn’t tariff back. There is nationalist sentiment sweeping across the country; Canadians are aware that they are in a war. It is an economic war, but still a war. And that means that, besides helping defray the cost of big income tax cuts with a boost to the GST, Ottawa has to take advantage of this unprecedented wave of nationalist sentiment by restarting the Canada Savings Bond program.
The CSB campaign started in 1945, having replaced the old Victory Bonds that were first used to raise funds in 1917 to fight the First World War. Anybody who is of a certain vintage will remember the annual Canada Savings Bond campaign, which ended in 2017. At one point, in 1987, it had $55-billion of savers’ capital, which would amount to $130-billion in today’s dollars. They were extremely popular but began to become less so once the Conservatives embarked on the road toward lower deficits and borrowing needs, furthered by the Jean Chrétien-Paul Martin Liberals’ era of fiscal conservatism in the 1990s and early 2000s.
But there is no better time than now to rekindle the program. Call them “Tariff War Bonds,” or “Canadian Investment Bonds,” or just go back to the old “Canada Savings Bonds.” That program was hugely popular and, in the current context, would be an ideal way to buy into the nationalistic feeling sweeping across the country.
If Canadians are willing to “Buy Canadian” at the local grocery store or retail outlet, and are choosing to vacation at home, the Finance Department should be aware that the demand for these bonds would be immense: a low-cost, stable source of funding that does not rely on the fickleness of foreign investors or bond fund managers. And for Canadians, they would offer another way to demonstrate their dedication to the country and the vital need to protect the domestic economy from our trade foe south of the border.
This could just be a dream, but imagine if the federal government could find a way to tap the record level of $2.3-trillion of idle cash and cash-like assets sitting on household balance sheets. Let’s put that to work! That sort of dough could end up financing not just a boom in vital infrastructure upgrades and mining/energy expansion, but also one hell of a tax cut, which is at least equally important and has no gestation period – and like Ireland, make Canada a global tax haven and a magnet for capital inflow and talent.
David Rosenberg is founder of Rosenberg Research.