No trading partner can reverse years of weak productivity

Relations between Ottawa and Washington have soured, and the therapy suggestions arrived on schedule: look across the Atlantic. Europe, the argument goes, is a stable counterweight to an unpredictable America. The Economist even floated Canadian membership in the European Union.

The premise is appealing, but it mistakes Canada’s problem. No trading partner can compensate for an economy that has spent years producing too little from each hour of work.

At first glance, the size numbers flatter the idea. The European Union produces close to US$20 trillion a year, one of the largest blocs on Earth. If diversification is the goal, why not lash the canoe to another giant?

But size tells only half the story. Gross domestic product (GDP) measures the size of an economy. GDP per capita measures how much it produces for each person. American output per person sits near US$85,000 and the European Union near US$43,000. Canada, around US$54,000, has drifted far closer to Europe than the United States. Demographics can influence that figure in the short run, but over time living standards rise or fall with productivity.

The reflex is to read that drift as a verdict on trade. That gets the cause backwards. Canada did not slide toward European income levels by selling to Europe. It slid there by getting less out of every hour its people work.

Carolyn Rogers, the Bank of Canada’s senior deputy governor, said as much in March 2024. She called the situation “an emergency” and said it was “time to break the glass.” In 1984, the Canadian economy produced 88 cents of value for every dollar an hour of American work produced. By 2022, that figure had fallen to 71 cents, a slide of nearly a fifth. Among the G7, only Italy lost more ground.

Productivity is how much value an hour of work creates. That is the engine. That is what stalled.

Now for the part the Atlantic enthusiasts skip. Much of the gap between American and European incomes is a choice. Europeans take longer holidays, shorter weeks, earlier retirements. They traded income for time.

Canada never struck that bargain. Canadians work close to American hours and take home European pay. The OECD counts about 1,709 working hours a year in Canada, near the American 1,799 and well above France’s 1,500 and Germany’s 1,343. On the measure that settles the argument, output per hour, Canada does not even match Western Europe. By OECD estimates, an hour of Canadian work produced about US$75 of value in 2023, against US$89 in France and US$97 in the United States. Canada reaches European income only by working longer hours, and still produces less value per hour.

So the Washington-or-Brussels argument starts to look like what it is. A way of avoiding the troubled engine. You can tow a stalled car to a bigger garage or a friendlier one. Neither turns the key.

None of this makes diversification foolish. Resting a trading nation’s whole weight on one dominant customer is a real risk, and it grows when that customer turns erratic. Spreading commerce toward Europe, Asia and Latin America is, and should have been, ordinary prudence. Diversification and substitution are different undertakings, though. No partner replaces the United States. Geography and a century of cross-border investment have settled that.

Trade is the easy part. Production is the hard one. A more productive Canada would carry real weight in Washington. Low productivity is what breeds dependence. Strength buys room to disagree.

The lever is no mystery. Workers produce more with better tools, and better tools come from investment in the machinery, software and infrastructure that let each worker produce more. Canadian firms have invested less than their American rivals for years. Between 2013 and 2023, capital spending per worker grew about 28 per cent in the U.S.and roughly seven per cent in Canada, and investment in the resource industries fell about 15 per cent. Business makes that investment. Government sets the climate in which firms decide whether to.

When a mine needs a decade of hearings before the first shovel, the company digs in Nevada instead. When a major pipeline is abandoned after the review rules shift mid-stream, as Energy East was in 2017, the next one never gets drawn up. When a carbon rule might change after the next election, the factory waits, or rises in Texas. Capital is not patriotic. It goes where the rules are clear and the answer comes quickly. None of that is decided in Washington or Brussels. It is decided in Ottawa and the provincial capitals.

A hostile president across the border has become a convenient alibi for a generation of officials asleep at the productivity switch. The slowdown began years before this White House. Washington did not create it. Ottawa has failed to reverse it.

Ottawa did not fail alone. The business class shares the blame, having lobbied for protection and subsidy when it should have pressed for a regime that rewards building. Raising the elbows toward Washington was never going to lift output per hour.

Carolyn Rogers warned two years ago that it was time to break the glass. Canada went back to debating trade instead of productivity.

Canada turns 159 this July 1. Birthdays invite celebration or reckoning, perhaps a measure of both. The fireworks will go up easily enough. The harder question is the one Ottawa keeps avoiding.

No trading partner can compensate for a productivity problem. This Canada Day, the honest gesture is to look past the border, at the engine idling in the driveway.

A country must earn prosperity before it can trade on it.

Dr. Marco Navarro-Génie is the Vice-President of Research and Policy at the Frontier Centre for Public Policy. An expert on radical revolutionary movements and political identity, he is a recipient of the King Charles III Coronation Medal for exemplary public service. He is the author of three books, including the 2023 release Canada’s COVID: The Story of a Pandemic Moral Panic, co-authored with Barry Cooper.