Comedian Jim Gaffigan recalls seeing the ubiquitous Canadian Tim Hortons coffee and donuts shops in America. “I always have the same thought: ‘Don’t force your culture on us’,” he quipped.
The joke gets a big laugh with Canadian audiences, wary about American influence seeping into their country. Lately, though, a bigger concern is that Canada is in danger of being ignored, particularly by US investors.
That is why comments made by Warren Buffett last weekend were welcomed so enthusiastically by Justin Trudeau’s unpopular Liberal government.
At the annual meeting of Berkshire Hathaway, the Oracle of Omaha said he was looking at new investments in Canada, adding that he has no hesitation about “putting big money” in the country.
“We do not feel uncomfortable in any way, shape or form, putting our money into Canada,” Buffett said, “... it’s terrific when you’ve got a major economy – not the size of the US, but a major economy that you absolutely, you feel confident about operating there.”
Greg Abel, CEO of Berkshire Hathaway Energy and vice-chair of the company’s non-insurance operations, is a Canadian and widely viewed as Buffett’s successor. He said the company is always looking to make incremental investments in Canada “because it’s an environment we’re very comfortable with.”
François-Philippe Champagne, Trudeau's industry minister, tweeted Buffett’s statement, calling it a “vote of confidence” – and the Liberals sure could use that.
Critics have accused Trudeau of lax fiscal and tight environmental policies, and of presiding over “the slow bleeding of Canada.” The worry is that jobs, capital, and head office functions have leaked south of the border for lower corporate and personal tax rates.
In recent years, investors have complained that Trudeau is more interested in taxing than generating wealth – that he’s a leader who believes the private sector is a golden goose that cannot be killed.
The chorus of criticism reached a crescendo in the aftermath of last month’s federal budget that increased spending and raised the capital gains tax on corporations and the wealthy.
David Dodge, a highly respected former Bank of Canada governor, said the tax rise would make Canada a less attractive place to invest, particularly for start-ups that rely on paying people in shares.
Another former Bank governor, Mark Carney (also an ex-Bank of England governor), said the budget did not focus enough on economic growth. “Governments that spend too much and invest too little will eventually pay a heavy price. The countries that nurture, welcome, and celebrate risk-takers will thrive,” said Carney, widely viewed as a potential and more centrist successor to the left-of-center Trudeau.
The prime minister reinforced his social activist credentials, telling VOX that when everything is going well “the wealthy will find lots of ways to make money off a prosperous and successful middle class.”
“I’m not worried about innovation and creativity. I’m worried about people being able to pay their rent and eventually buy a home,” Trudeau said.
Americans often don’t pay much attention to Canada. But if there is an impression after Trudeau’s eight and half years in charge, it is probably that the Great White North has veered toward quasi-socialism – or that its citizenry is even more reliant than ever on welfare.
That might be a bigger disincentive to investment were the Biden administration not even more addicted to taxing and spending. Canada has a slightly higher corporate tax rate at 26.21%, compared to America’s 25.77%, but President Joe Biden’s State of the Union address proposed to raise the US level to 28% and to increase the top individual income and capital gains tax rates. The Trudeau government has been criticized for a budgetary deficit that is 1.4% of GDP – small potatoes compared to the US’s 6.3% shortfall.
So, despite criticisms and the perception that it is antagonistic toward business, the Canadian government has been remarkably successful at luring inward investment in recent years. Foreign direct investment is at healthy levels, and Canada has established itself as a key player in the global electric vehicle end-to-end battery supply chain, announcing multi-billion-dollar manufacturing and assembly plants by Honda, Stellantis/LG, and Volkswagen, among others, in recent months.
Thanks to Biden’s Inflation Reduction Act, the effort has cost Canada dearly in terms of subsidies – the terms of the Stellantis and Volkswagen deals stipulated that Ottawa match incentives offered to battery makers in the US under the IRA.
Canada’s Parliamentary Budget Office has estimated that the federal government will take 20 years to break even.
But as Tyler Meredith, a former economic adviser to Trudeau, said, Canada’s auto industry is “an amazing story of industrial renaissance.”
During the financial crisis of 2009, it looked like Canada’s auto sector might go the way of Australia and lose domestic production altogether. It has not only maintained production, but it is building the next generation of electric vehicles. “It is super attractive because it has the natural resources, talent, and subsidies,” Meredith said.
The area that even the government’s strongest supporters like Meredith concede there is work to do is the decline in the capital investment base in the resource sector. In 2014, the year before Trudeau became prime minister, it was around $73 billion; today it is around half of that.
The collapse of commodity prices is largely responsible, but the price crash was
compounded by the new government introducing a more rigorous environmental assessment process that increased political risk and lengthened timelines for project reviews. Since then, the oil and gas sector has seen a 43% drop in investment value (in 2015 dollars). Critics contend that a Liberal government hostile to fossil fuels put hurdles in the way of future development and hoped the US shale revolution would price Canada out of the oil market.
But it is not only the oil and gas sector that has seen investment dip. The clean tech industry has also seen a 27% drop since 2017, and even the critical minerals sector, on which so many of the government’s EV hopes are resting, has atrophied, with nickel, cobalt, lithium, uranium, zinc, lead, and platinum all recording double-digit declines, according to a new report by the Macdonald Laurier Institute think-tank.
Contrary to the claims of the opposition Conservative leader, Pierre Poilievre, Canada is not “broken.” It continues to rank highly (though not as highly as it used to) in the World Competitive Index in the 15th spot. It has a well-educated workforce, modern infrastructure, an abundance of energy, and a strong banking sector – and it is relatively easy to start a business.
Meredith says that while people associate Trudeau with poverty and emissions reduction, “he also has an enviable economic investment record” – including the newly completed Trans Mountain pipeline expansion, EV plants, and AI clusters in Toronto, Montreal, and Vancouver. “All those things happened because of intentional government decisions and will serve Canada well over the long term,” he said.
But if the business environment is not as bad as the opposition claims, neither is it an investment Babylon.
Finance Minister Chrystia Freeland admitted as much when she hired another former Bank of Canada governor, Stephen Poloz, to figure out ways to convince Canada’s pension funds to invest more locally, rather than transferring four-fifths of their wealth overseas.
But, as David Dodge pointed out, the job of a pension fund is to raise money to pay pensioners so they invest where they get the highest returns. They are making long-term bets in places privatizing airports and ports, and building toll roads, which suggests that Canada is not as attractive as an investment destination as the government, or even Warren Buffett, thinks.