Canada has an opportunity with U.S. tariffs to reject “economic subordination” and galvanize innovation to grow an independent, resilient economy, panelists said during a webinar by the Council of Canadian Innovators.

“Foundationally, this is a moment where we either have our head in the sand or we get our head out of that crevice and we decide what we’re going to do,” said international lawyer Barry Appleton (photo at right), managing partner at Appleton Associates International Lawyers in Toronto and co-director at the Center of International Law at the New York Law School.

Canada for many decades has been economically reliant on having readily available trade access to the U.S. market, he said.

But Canada is now at an existential point in its history, Appleton said. Canadians have to “basically grow up. And that’s not going to be easy, because we’ve been living rent-free in our ‘parents houses,’ in their basements, and now we’ve got to get out.”

Tariffs imposed by U.S. President Donald Trump are an economic shock to Canada’s economic system and will likely disrupt deeply integrated supply chains that have contributed to more than $1 trillion in trade annually, said Horatio M. Morgan (photo at left), economist and associate professor at the University of Waterloo’s Conrad School of Entrepreneurship and Business.

However, the tariffs also present significant opportunities, he said. “Perhaps for the first time in 200 years we have a break to really reimagine and to think deeply about our economic potential or sovereignty, and start to really craft a way forward towards true economic independence.”

“We have to stop accepting and tolerating economic subordination. We’ve done that since colonial times,” Morgan said.

“What we’ve done is accepted that we should offer the beaver fur while the British made the hats, that we should offer the lumber while the British made the ships, that we should offer the parts for cars while the Americans manufacture them.”

“We need to move beyond retaliating with tariffs, to a multi-pronged approach that will leave us better than a tit-for-tat strategy of matching U.S. tariffs,” Morgan said.

Laurent Carbonneau (photo at right), director of policy and research at the Council of Canadian Innovators (CCI), pointed out that prior to Trump’s second administration, Canada was divided politically.

“Now we are seeing more political unity in Canada on a serious issue than I think I’ve ever seen in my lifetime,” he said.

“Nothing is more impressive to me than [the tariffs and Trump’s threat of economically annexing Canada] having brought Alberta separatists or regional activists and Quebec separatists into the same tent and gladly putting up a maple leaf flag on their front lawns.”

Canada now needs to rethink what its value-add to the world’s economy is, Carbonneau said. Innovation and innovative businesses have to be part of that value offering, he added.

“I really don’t think we can go back to being hewers of wood and drawers of water on terms that are even worse for us than they were a couple of years ago,” Carbonneau said.

Tariffs are a fight over the “20^th century economy”

The post-World War II consensus, which was driven by the U.S. and shared democratic values, “is basically over. It’s broken,” Appleton said. “We cannot rely on what we thought we had – a rules-based order based on what we negotiate with shared values with our friends.”

While Canada banked on having guaranteed market access to the U.S., Canadian products and businesses lacked sufficient innovation and productivity, he said.

“Right now we’re surviving on a lower price-debt currency and proximity to the U.S. market with guaranteed access,” Appleton said. “We need to think how we change the value chain, how we change the value proposition and go from there.”

This includes creating resilient strategies to spur long-term “smart” jobs that create real prosperity, he said.

Appleton said a smart strategy for Canada is to diversify its products, services and markets to fit within and leverage global value chains that are emerging in AI, cloud compute services, cybersecurity, biotech and other areas.

“I believe it’s the innovation sector that’s likely to take the Canadians out of the abyss and into the way forward,” he said.

Impacts on innovation policy, such as Canada’s digital sales tax, will only open up another round of issues “that are highly problematic on both sides of the border,” he noted. “We need to stop doing things that are foundationally stupid and start with the smart.”

Morgan said it is crucial for Canada to continue to dismantle barriers to interprovincial trade and provide opportunities – especially for vulnerable small and medium-sized businesses – to sell their products and services within Canada.

In the global knowledge-based economy, there also needs to be more sustained,  accelerated investment to own, commercialize and leverage critical intangible assets, he said. These include data, digital technologies and infrastructure, AI algorithms and conventional intellectual property such as patents and trademarks.

Morgan said his research tells him there are two main factions in the Trump administration. There are the economic nationalists inspired by Steve Bannon, an American media executive and former investment banker and White House chief strategist. This faction was later joined by another faction, the techno-right group –  the Elon Musk wing.

The factions believe, for example, that the economic decline of Britain was tied to Britain embracing free trade and becoming deindustrialized, Morgan said. “They’re really stuck at the 20^th century and they’re seeing their challenge is to reverse the [global] industrialization and bring back the factories [to the U.S.].”

 The tariff fight with the Trump administration is really a fight over the 20^th century economy based on trade in commodities and other goods, he said. “It’s really the last fight for dwindling economic rents.”

Boosting innovation is Canada’s smartest strategy

Carbonneau said the CCI has identified four pillars that innovators need to succeed:

• Access to talent.
• Access to capital.
• Access to customers.
• Marketplace frameworks with regulation and other pieces.

As for access to capital, he said the CCI was pleased to hear prime minister-elect (and now Prime Minister) Mark Carney say he plans to scrap the changes to the capital gains tax inclusion rates that were introduced by the Justin Trudeau government.

When it comes to access to customers, the key is public procurement of Canadian goods and services across all levels of government, Carbonneau said.

Public procurement represents about 15 percent of the Canadian economy, or about the same size as the Alberta economy or the natural resources sector, he noted.

“There’s a real sleeping giant there that I think government needs to become a much better buyer and make the public sector market look a lot more like a functioning marketplace and less like a bureaucratic nightmare,” he said.

Appleton agreed, saying: “Why is it that our government wants to buy from American tech providers when [Canadian businesses] provide fabulous stuff? I talk to innovators all the time and they say, ‘We don’t even make the [procurement] list but we provide the same or better.’”

The Trump administration wants to pressure Canada to renegotiate the United States-Mexico-Canada (CUSMA) trade agreement now, even though the treaty doesn’t expire until 2036, he said. The U.S. wants short-term bilateral agreements, he added.

But for all intents and purposes, “the CUSMA is dead. Foundationally, that treaty no longer has any teeth” because the U.S. isn’t abiding by it, Appleton said.

Nevertheless, he added, Canada will still need to negotiate market access with the U.S. because “we can’t compete if we don’t have access.”

“Now we have to earn our way to sell into the United States and we need to negotiate that to make it worthwhile. Otherwise, investments will not come our way,” Appleton said.

It makes no sense for Canada to get into an escalating fight over tariffs with the U.S., he said. “Because otherwise we get ‘Zelenskyed.’ We do not want to be the next Zelensky. We cannot allow that to happen ever, because that’s how you lose your ability to actually function.”

Canada’s short-term strategy should focus on responding to U.S. tariffs in ways that don’t bankrupt the country, Appleton said.

The middle-term strategy should be what Canada can do to get into the global value chain at the right place. And the longer-term strategy should be ensuring that Canada isn’t vulnerable again to these types of economic disruptions.

The country will need more regulatory tools to actually accomplish these strategies, Appleton noted.

 To be internationally competitive, he said, Canada will need to focus on at least one of four pillars of competitiveness: lower wages, “which we don’t have and we don’t want;” better productivity; better and more innovative products; and a tax policy that encourages investment.

Carbonneau reiterated that improving public procurement offers the greatest potential and can be done relatively quickly. “If we can make the federal and provincial governments the world’s best public buyer of innovative products and services from companies, I think that would be the single best bang for buck.”

Morgan said Canada needs to start talking with European countries, India and perhaps even China about diversifying Canada’s markets and providing more opportunities for Canadian businesses.

Appleton agreed: “We need to basically put on the ‘big boy pants,’ figure out what we’re going to do as a real country, and then think about what’s our diversification strategy. Innovation is our best route because that’s the future economy, period.”

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