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Canada will pay a price for being out of step with Trump’s tax and policy approach

Globe and Mail reporter Barrie McKenna.

Canadians may be tempted to keep calm and carry on amid all the chaos swirling around President Donald Trump.

No one really knows with certainty what the U.S. will do on taxes, trade, immigration, or financial and energy regulation.

Maybe the safest response for Canada is to do nothing at all.

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Wrong. Complacency could prove lethal for Canada. The world changed in November. And while the policy details are still murky, it's now apparent the United States is moving toward a world of less regulation, sharply lower taxes and greater protectionism – whether we like it or not.

Canada is on a very different trajectory. And the divergence is making the business community increasingly wary.

Doing nothing risks exacerbating the chronic competitive disadvantages that Canadian businesses already face and making the country a less attractive place to invest.

"If we continue to pursue a higher tax and higher regulatory approach we only help to tip the field even more to their advantage," argued Drummond Brodeur, a global portfolio strategist at Signature Global Asset Management in Toronto.

With the U.S. Congress under Republican control, Canadians should focus less on the messenger in the White House than the message, he said. "The Trump agenda is about fundamentally changing how the U.S. conducts business and policy … We are heading in the opposite direction."

Canada would be unwise to match every policy move the U.S. makes. But there will be a price to pay if it finds itself completely out of sync with its neighbour and main trading partner.

"We have to maintain an eye to that competitiveness relationship, or we risk getting clobbered," said John Manley, a former Liberal finance minister who now heads the Business Council of Canada, which speaks for 150 of the largest companies in the country.

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"You can diverge a little bit, but you can't diverge a lot."

Canada is now working at cross-purposes of U.S. on a number of policy fronts – from personal and business taxes to climate policy and labour regulations.

In Ottawa, the Liberal government of Justin Trudeau is looking at raising as much as $3-billion a year extra in its upcoming budget by eliminating tax breaks for upper-income earners, perhaps by squeezing tax breaks for capital gains.

Ontario and Alberta introduced carbon taxes this year that will eventually take an extra $10-billion a year out of consumers' pockets.

Mr. Trump is talking about major tax breaks for individuals, although the ultimate shape of any tax changes depends heavily on what the Republican-controlled Congress will do.

Mr. Trudeau likes to point out how both he and Mr. Trump are focused on improving the lot of the middle class.

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But on the ground, there are significant policy differences. Mr. Trump is pushing for across-the-board tax relief in a country where there is already worrying levels of income inequality and deteriorating social mobility. Meanwhile, the Trudeau government is targeting inequality, even though income gaps are much less stark in this country.

"It's remarkable that Canada is moving to address income inequality when the U.S. is the poster child for income inequality," pointed out Craig Alexander, chief economist at the Conference Board of Canada. "Canada has lower income inequality and relatively good social mobility, but is leaning against inequality through higher taxes on high-income earners."

And while it's true that most workers can't easily pick up stakes and move to a lower-tax jurisdiction, relative tax levels can be an important factor in attracting skilled workers and investors.

"America already pays its high-skilled people more and taxes them less before Trump does anything to the tax system," Mr. Alexander pointed out. "This creates a challenge for Canada in terms of competing for talent."

There is a similar disconnect on the corporate tax side. Canada risks going from having a significant competitive edge over the U.S. to facing a disadvantage if Congress moves, as expected, to slash the federal corporate tax rate in half. In Canada, several provinces have raised business tax rates or deferred plans to cut them in recent years.

Business groups have been warning governments in Ottawa and provincial capitals about the Trump effect, and how it could undermine competitiveness. Job No. 1 is to make sure Canada stays competitive, according to Mr. Manley of the Business Council.

"The tax that matters is the one you collect, not the one you never got because the business has moved," he said.

In the oil patch, there are similar concerns that the Trump administration's determination to loosen regulation on energy companies will leave higher-cost Canadian producers even further behind. The Liberal government is considering new rules that would force marketers of gasoline and home-heating fuels to reduce the carbon content of the energy products they sell. It's also pushing ahead with regulations to force oil and gas producers to rein in methane emissions, even though the Trump administration is moving to roll back matching rules passed by president Barack Obama.

It's not the only example of regulatory divergence. As part of a major overhaul of its labour laws, Ontario is looking at making paid sick days mandatory, boosting paid vacation time to three weeks from two and encouraging unionization in smaller workplaces.

The regulatory pendulum is swinging the other way in much of the U.S., where there has been a proliferation of so-called right-to-work laws (six new states in the past five years). These laws make it tougher for unions to organize and collect dues.

Businesses in Ontario are also crying foul over Premier Kathleen Wynne's move this week to lower residential electric bills. The discounts won't apply to most large industrial and commercial electricity users, who often face rates that are twice as high as in neighbouring U.S. states.

There are areas where Canada can gain a competitive edge over the U.S. A trade war between the U.S. and China, or Mexico, could make Canada a safe haven for investors. Likewise, if the Trump administration clamps down on immigration, Canada could have its pick of the best and brightest rejected by the U.S.

Like it or not, Canada is a small open economy. It can't carry on as if its neighbour and main trading partner doesn't exist – at least, not without paying the price.

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About the Author
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

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