| | The country is much less stable now than it was during Trump’s first term.By: Allison Fedirka
From
a geopolitical perspective, the U.S.-Canadian relationship is enviable.
The two countries lack the dramatic historical, cultural and religious
differences that often lead to conflict between neighbors – especially
prosperous ones. Relative to most other countries, they both enjoy a
high degree of physical protection from potential enemies, thanks to the
Pacific and Atlantic oceans, and have managed to maintain, by global
standards, a peaceful, secure border. Through
treaties and trade agreements, they have avoided conflict and have
integrated their economies such that stability for one is stability for
both. For example, Canada provides just over half of petroleum imports
to the U.S., and since imports account for 37 percent of total U.S.
petroleum consumption (as of 2023), Canada is responsible for nearly 20
percent of total U.S. consumption. The U.S. also relies on Canada to
supply critical materials such as potash, uranium and lumber, and the
two share highly integrated production chains in major economic sectors
such as the automotive industry – all of which reduces vulnerabilities
within the U.S. economy. Put
simply, Canada is crucial to the United States’ ability to project
power, because when Washington doesn’t have to attend to its own
backyard, it has more time and resources to spend elsewhere. But
even under ideal circumstances, stability is never guaranteed. The
government in Ottawa is in the throes of a political crisis brought on
by economic and social pressure. Early last week, Prime Minister Justin
Trudeau announced his resignation from an office he held for nearly a
decade. His departure comes alongside a dramatic rise in the
Conservative Party’s popularity. By all accounts, the ruling Liberal
Party is poised to lose power in the upcoming federal election, with
polls showing the Conservatives with a strong lead. Elections were
initially slated for Oct. 20, but Trudeau’s resignation will likely
result in an earlier date as the opposition is expected to call for a
confidence vote shortly after the resumption of Parliament on March 24. The
crisis was long in the making. The rising cost of living, labor
shortages, immigration tensions and an affordable housing crisis have
compelled the government to engage in major policy overhauls. Many of
these changes have yet to yield the desired results. Canada’s inflation
peaked at 8.1 percent in June 2022 and trended downward to 1.9 percent
in November 2024. Though inflation has slowed, the price of essential
goods remains high for consumers. Community Food Centers Canada
estimates one in four Canadians face some level of food insecurity.
These numbers started to climb in 2019, impacting not only those living
in poverty but also some 15 percent of people not living in poverty.
Wages initially lagged behind inflation after the pandemic but have
since recovered. But higher wages drive up the cost of services and
labor at a time when economic growth lags slightly behind inflation. The
government has struggled to design a policy that allows it to
successfully address labor shortages in critical areas without relying
too much on immigration. Since the pandemic, Canada has experienced
major demographic shifts. Fertility rates are at record lows (1.33
births per woman in 2022), and millennials now outnumber baby boomers.
Population movement between provinces has increased to its highest
levels since the 1990s, resulting, broadly speaking, in people leaving
urban areas for more rural settings. In recent years, the government has
relied on immigration to compensate for Canada’s population problems.
Last year, the country’s total population stood at 40 million, and
population growth was the highest it had been in almost 70 years (3.2
percent). Immigration now accounts for nearly all (97.6 percent)
population growth in the country, with temporary residents accounting
for 6.2 percent of the total population. Canada
uses a points system to award immigration status that, in the past,
rewarded white-collar, highly educated individuals. However, many of
those who gained entrance to Canada could not find jobs consistent with
their skill sets. This was due to a mismatch of skills in the labor
force and jobs and the economy failing to create jobs at pace with
population growth. In 2021, the government loosened immigration measures
to make working-class jobs more attractive. Two years later, the
government loosened regulations to allow more immigrants to work in the
country. This included increased immigrant quotas, requirements to apply
for work permits once already in the country and allowing international
students to work up to 20 hours a week. These
measures failed to offset the labor shortages. Demand for skilled work
still outpaces the available supply of tradespeople and blue-collar
workers, especially in construction, trades, agriculture, transportation
and health care. In turn, this has increased the cost of labor, created
delays in services and strained quality control standards. There are
concerns that the shortages will persist: Some 700,000 of Canada’s 4
million trade workers are set to retire by 2030, putting even more
pressure on labor scarcity. Socio-economic
pressures have forced the government to change course on how it plans
to deal with immigration. Unemployment slowly began to rise in 2024.
Immigrants living in Canada for less than five years had nearly double
the unemployment rate (12.6 percent) in July as the national average
(6.4 percent). The uptick in joblessness has made social welfare
services both more expensive and less able to meet the population’s
growing needs. In late 2024, the government announced it would reduce
the annual allotment of permanent residents, which came to 500,000 in
2024, to 365,000 by 2027. It also removed some of the looser regulations
introduced in 2023. The moves aim to reduce the share of temporary
residents to 5 percent of Canada’s population by the end of 2026. (In
theory, the measures will still allow for workers to participate in key
labor markets such as health care and trades.) Labor
shortages, slow economic recovery and the government’s immigration
policy are seen as major contributors to Canada’s housing crisis. From
2000 to 2021, housing prices in Canada rose by 355 percent while median
nominal income rose by only 113 percent. Lower inflation and lower
interest rates have failed to reverse the trend. Increased immigration
and labor shortages in construction and trades have put upward pressure
on prices and slowed growth in supply of available homes. Market
indicators such as pre-construction sales and new condo sales continued
to fall in 2024, suggesting the problem will persist in the near term.
Market analysts estimate that, in the best-case scenario, it will take
at least five or six years for supply to catch up with demand. Academics
and some market analysts have also noted structural shifts in
homeownership as part of the problem. Fifty or so years ago, Canada had
more government programs in place to fund social housing programs. These
programs were reduced or eliminated in the 1990s. Experts also point
out that housing financialization intensified after the Canada Mortgage
and Housing Corporation shifted from building homes to insuring
mortgages. As a consequence, they argue, housing came to be seen more as
a wealth-building tool rather than a basic social need. The rise in
prominence of short-term rentals, like Airbnbs, has also contributed to
the problem. Approximately 20 percent of residential properties in
British Columbia and Ontario (two provinces with some of the most severe
affordability problems) are owned by investors. Government
efforts to ease pressure on housing prices seem to have failed. More
than 50 percent of Canadians worry about their ability to pay their
mortgage or rent, and a similar number say they could lose their homes
if their financial situation were to worsen. Two-thirds of Canadians
with mortgages reportedly already have trouble meeting their financial
commitments. In the spring of 2024, a new housing plan was launched to
“unlock” 3.87 million new homes by 2031. The challenge here will once
again be the strain of having to fund such extensive federal programs to
meet the population’s socio-economic needs. Unsurprisingly
these economic problems have created social unrest. Citizens and
longer-term permanent residents find themselves competing with new
immigrants and temporary residents for government funds. The influx of
immigrants has also been difficult for Canadian society to absorb,
resulting in a lack of assimilation among the different immigrant groups
that often remain concentrated in semi-isolated communities and more
marginal positions, similar to what we see in many European countries. All
this is to say that Canada is not as socially or economically stable as
it was during President-elect Donald Trump’s first presidency. Some
warn that Canada's slow economic growth and structural issues leave it
ill-suited to absorb shocks such as new tariffs from the United States.
Economists estimate that, if Trump were to follow through with his
blanket 25 percent tariffs, it would reduce the size of the Canadian
economy by 2.6-3.8 percent. Retaliatory measures from Canada could push
that figure as high as 5.6 percent, according to economists from
Scotiabank. That kind of decline would trigger greater instability in
Canada and could have knock-on effects for the U.S. This could easily
result in greater undocumented migration, more cross-border smuggling of
goods and other security concerns. In this sense, when the U.S. designs
trade policy for Canada, it must consider how it would affect U.S.
consumers. |