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FILE PHOTO: Canada's Foreign Minister Chrystia Freeland speaks during a news conference at the Canadian Embassy in Washington D.C., U.S. June 13, 2019.
Freeland to miss her target, thanks to Trudeau
Canadian Finance Minister Chyrstia Freeland is expected to reveal Monday that she has missed the $40.1 billion deficit target that she set for herself last year, the latest in a long string of fiscal targets Justin Trudeau’s government has missed over the years.
Freeland said Tuesday she expects the fall economic statement, which she will present on Dec. 16, will show a declining debt-to-GDP ratio, but she did not mention the deficit target. “I chose my words with care because it is important to be clear with Canadians. It is important to be clear with capital markets.”
The missed target will make Freeland a target of criticism by the business community and Conservatives.
According to a report in The Globe and Mail, Freeland and Trudeau are at odds over spending. Her office and nonpartisan Finance Department officials are unhappy about the government’s $6.28-billion plan for a holiday sales-tax break and $250 checks for people earning up to $150,000.
The gimmicky measures – which have not moved the polls for the Liberals – seem to have made it impossible for Freeland to hit her target.
The tension between Freeland and Trudeau revives questions about her future in the government. Trudeau brought Public Safety Minister Dominic LeBlanc, not her, to Mar-A-Lago last month, and the Globe reported Thursday that Trudeau is again trying to recruitMark Carney, presumably to take her job.Correction: This post originally referred to Dominic LeBlanc as the transport minister.
A worker is assembling auto parts on a production line at the Li Auto Manufacturing base in Changzhou, Jiangsu Province, China, on March 27, 2024.
Canada in lockstep on Chinese auto software
Deputy Prime Minister Chrystia Freelandannounced Tuesday that Canada may ban Chinese-made software in vehicles, following a similar plan from the US government.
Canada recently announced a 100% tariff on Chinese EVs, along with 25% tariffs on aluminum and steel. China has announced it will challenge the tariffs at the World Trade Organization, where it could succeed. A security-based ban on software would potentially represent a surer way of closing the door on Chinese electric vehicles, which threaten to overwhelm North American manufacturers.
Governments in both Canada and the United States have sunk tens of billions into tax credits, rebates, and subsidies for EV manufacturers, but China, which has had a huge head start, looks able to outcompete the North Americans unless they are prevented by trade barriers.
The announcement by Freeland is another sign that those trade barriers are likely to be imposed in unison, since the Canadians want to be in lockstep to ensure continued access to the enormously important US market. The protectionist measures will slow the electrification of North America passenger vehicles, but leaders in both countries seem to have decided that it is politically impossible to surrender their markets to China.
Canada's Prime Minister Justin Trudeau speaks to the media following a cabinet shuffle at Rideau Hall in Ottawa.
Team Trudeau adds fresh faces
Justin Trudeau shuffled his cabinet on Wednesday, a major shakeup as his government struggles in the polls ahead of an election in which the Conservatives look poised to make gains. Trudeau dropped seven ministers who were seen to be struggling and introduced seven newcomers.
Most of the key players on Canada-US files stay in place. Chrystia Freeland, the deputy prime minister and finance minister who played a central role in negotiating USMCA, keeps her dominant position. Foreign Affairs Minister Mélanie Joly remains in place, as does François-Philippe Champagne, the energetic industry minister, who has been busy luring EV companies to open plants in Canada.
Anita Anand, the well-regarded defense minister who worked with her American counterpart on upgrades to the joint NORAD northern defense system, takes the helm at the Treasury Board, a powerful but less public-facing post. Taking her place at defense is former Toronto police chief Bill Blair. Pablo Rodriguez, the Quebec MP who led the government’s (so far) unsuccessful effort to squeeze money for journalism out of the tech giants, is shifted to Transport. Pascale St-Onge, another Quebecer, will take over his department, perhaps opening the door to a fresh approach to Google and Meta.
The shuffle comes as Trudeau approaches eight years in office. He is now the longest-serving leader in the G-7, but he faces a difficult path to reelection, with low approval ratings and signs that the public is losing faith in his leadership, particularly on economic issues. A poll released Wednesday shows his Liberals 10 points behind the opposition Conservatives. Trudeau has said he plans to lead his party into the next election, expected either next year or in 2025, but no prime minister has won a fourth consecutive election since Wilfrid Laurier, in 1908.Trudeau’s fight with big tech could bleed into US election
Justin Trudeau and Joe Biden appear to be headed for a showdown over tax policy that could bleed into the US presidential election – and Bruce Heyman, one of Canada’s best friends in the United States, is worried.
Heyman, a former Goldman Sachs banker who Barack Obama sent to Ottawa as ambassador to Canada in 2014, is normally upbeat about the relationship between Washington and Ottawa. During the long and difficult USMCA negotiations, when Donald Trump threatened to tear up NAFTA, Heyman was a loud and persistent voice calling for calm, pointing to the benefits of the enormous cross-border trade.
But he has been worried since last Friday when he watched Finance Minister Chrystia Freeland firmly defend Canada’s plan for a new digital service tax at a forum in Aspen, and absorbed a stern warning from current Ambassador David Cohen. The plan is to impose a 3% tax on big tech revenue in Canada.
“I would recommend everybody take Ambassador Cohen’s comments last week very seriously,” Heyman says. “The US would have to respond in some way.”
In a Canadian interview published Friday, Cohen said that if Canada proceeds with its tax plan, the United States will have “no choice but to take retaliatory measures in the trade context, potentially in the digital trade context.”
On the same day, in Aspen, Freeland stood firm, delivering lines that sounded very much like those she delivered during the high-stakes USMCA negotiations.
“We believe in being nice,” she said. “We believe in being polite. When we have disputes we think they should be negotiated in a civil way. But we also believe at the end of the day you have to stand up for the national interest.”
How we got here
The roots of the dispute go back to the Canadian election of 2019, when the Liberals promised to “make sure that multinational tech giants pay corporate tax on the revenue they generate in Canada,” in the form of a 3% digital services tax, similar to measures in the UK, France, and Italy. Freeland included the measure in a budget document in 2020 but postponed the plan for two years while OECD members worked toward an international agreement. The 143 countries in the tax deal are trying to reallocate taxing rights on about $200 billion in profits from multinationals to the countries where they do business.
But the OECD talks ended two weeks ago with the parties agreeing to another delay, at which point Freeland said Canada would bring in its own tax on Jan. 1, 2024. “Canada is being asked, again, having agreed to a two-year standstill, to agree to further standstills with no fixed date … so for us, that’s clearly a disadvantageous position,” she said in Aspen.
Canada is isolated. Of the countries in the tax talks, only four other countries — Belarus, Pakistan, Russia, and Sri Lanka — rejected a one-year extension. “When you look at the countries that do not agree with that position, they are not countries that you would normally think Canada wants to be a part of,” Cohen said. “They are a combination of autocracies and Third World countries.”
This is the second run the Canadians have taken at Silicon Valley this year. In June, Trudeau’s government passed a law that would require social media platforms to make payments to Canadian news outlets. Both Meta and Google have balked and moved to drop Canadian news from their platforms rather than pay, embarrassing the government.
Tyler Meredith, a former advisor to Trudeau, helped write the tax policy in question. He says the Canadians are determined to implement a digital services tax, in part because multinationals are able to shelter their profits in low-tax jurisdictions, meaning they extract money from Canada without contributing meaningfully to the economy.
How Washington will respond
Meredith says that while the United States can impose tariffs, they may not win a trade-dispute resolution process on the issue because the tax measure is within Canadian jurisdiction, and any tax would apply to both Canadian and foreign companies. He says the government won’t want to just drop its plan.
“Having put effectively four years into this effort and already made assumptions in our fiscal framework … and having worked in partnership with the US and other OECD partners, it’s very hard for Canada to move off that position without confidence we’re getting something in return.”
But Heyman warns that Cohen isn’t bluffing. “The US embassy and the US government are going to work hard to stand up for US industry. I don’t know what actions will or could be taken. But, trust me, I would just take the ambassador's comments seriously.”
Jonathan Lang, Eurasia Group’s director for trade and supply chains, agrees that the US will feel obliged to respond if Canada proceeds. “I do think the US would have to respond with a tariff regime of some kind if DST were to move forward in Canada, sidestepping the OECD negotiations,” Lang says. “That would be a warning to others.”
Lang, who was director for international economic affairs in Trump’s White House, points out that the former U.S. president threatened France with a wine tariff when French President Emmanuel Macron brought in a similar tax in France. The Americans, under Biden or Trump, don’t want to see countries imposing taxes on U.S. tech companies. “I strongly suspect that the US would have to draw a line in the sand of some kind here,” he adds.
This high-stakes showdown is taking place in the run-up to the 2024 presidential election, in which Trump can be expected to argue that Biden is too soft on foreign competitors.
That is what makes Heyman nervous about the whole thing: “The US in 2024 may have a Trump card, and that changes the dynamic of the poker game entirely.”
In April, Hillary Clinton visited Belfast to mark the 25th anniversary of the Good Friday Agreement.
A Clinton in Ottawa
Canadian Liberals gathered in Ottawa on Thursday for their annual political convention. This year’s event features a special guest appearance from Hillary Clinton, who will be chatting with Deputy PM Chrystia Freeland on Friday. Coincidence? Well, it’s hard to ignore the parallels.
The conference opened with a speech from Justin Trudeau, after which he flew to London for the coronation of King Charles III. In his absence, Clinton and Freeland will discuss the future of the US-Canada relationship.
As always, Canadian political watchers are looking at this as a leadership test. After all, Trudeau is eight years into his tenure, has accumulated more political baggage than a Samsonite factory, and suffers from poor approval numbers.
Freeland, by far the most powerful minister in Trudeau’s cabinet, is often touted as a possible successor to Trudeau. But Liberal strategists worry that pitting her against Conservative Party leader Pierre Poilievre – who detractors have likened to Donald Trump – could set up a replay of the 2016 US election, which Democrats lost. And Freeland faces some of the same issues as Clinton did: Trying to break the glass ceiling as the first Liberal female PM, she over-indexes on competence and underperforms on the stump.
In any case, Trudeau says he intends to stick around for the next election, likely in 2025, although he leads a minority government that could fall before then. Which is why the Clinton-Freeland exchange will be so closely parsed.
PM Justin Trudeau visits Canadian troops in Latvia.
What We’re Watching: Trudeau’s 2% trouble, media giants and their final tweets, friendshoring promise vs. reality
Trudeau’s defense spending
Canadian PM Justin Trudeau has privately told NATO officials that Canada will never meet the alliance’s target of 2% of GDP on military spending, the Washington Post reported Wednesday. The revelation is based on a US intelligence document leaked on the Discord gaming app, allegedly by a 21-year-old intelligence staffer.
The document says NATO allies — particularly Germany and Turkey — are irritated by Canada’s reluctance to increase defense spending and its inability to fulfill commitments to the alliance. “Widespread defense shortfalls hinder Canadian capabilities,” the document said, “while straining partner relationships and alliance contributions.”
Earlier this week, dozens of former top Canadian security officials, military commanders, and politicians released an open letter calling on Trudeau’s government to take national security and defense more seriously. Canada’s defense department pushed back, saying that it just agreed to spend $19 billion on 88 F-35 fighter jets and that it’s investing in modernizing NORAD capabilities and increasing its footprint in the Canadian-led NATO battle group in Latvia.
The Liberals argue that they have increased defense spending, and the Parliamentary Budget Watchdog, an independent office, confirms that nominal Canadian defense spending grew by 67% between 2014 and 2021, and Canadian outlays as a share of GDP rose by roughly 40% – from 1.0% of GDP in 2014 to 1.4% of GDP in 2021.
That’s still well shy of the 2% goal, but even annoyed allies are behind. While Germany promises to reach the 2% goal, they too are currently at about 1.4% of GDP, and the war is on their doorstep. The US, for its part, leads NATO’s defense spending at 3.47% of GDP. With war raging in Ukraine and tensions rising with China, NATO chief Jens Stoltenberg has said the 2% target should be the floor, not the ceiling.
But domestic politics always drives the appetite for doing more. Increasing Canada’s defense spending has never been a political winner or a political necessity for any party, right or left, as the unstated assumption has always been that “the US will carry the weight.” Fighting wars may be part of the future, but fighting against inflation and for health care dollars are also security issues for politicians — job security that is.
CBC, NPR & PBS fly the coop
Elon Musk ruffled some feathers with new Twitter labels for public broadcasters on both sides of the border this month – and there are implications for the future of his platform and the media outlets.
It started when Musk decided that NPR’s Twitter account should be labeled “State-affiliated media,” as if it was an official mouthpiece for the U.S. government, like China’s Xinhua News Agency. Musk relented and changed NPR’s label to “Government-funded media,” but NPR stopped tweeting in protest. PBS followed NPR’s lead.
Meanwhile, in Canada, Conservative Leader Pierre Poilievre, who wants to end Ottawa’s massive subsidy to the Canadian Broadcasting Corporation, asked Musk to slap a new label on CBC’s Twitter account and celebrated when he did. CBC, like NPR and PBS, has hit the pause button on its Twitter account. Musk responded by changing the label to “69% Government-funded media,” a juvenile joke.
The Twitter chief seems happy to drive content producers away from his platform, so expect more of the same. Even Swedish public radio has taken its leave – not because of a label, but because its audience left Twitter first.
Friendshoring or friend-ignoring
Canadian Finance Minister Chrystia Freeland delivered a speech in Washington last week calling for “friendshoring,” or trade policy that centers on economic cooperation between like-minded countries, particularly Canada and the US.
In her budget this month, meanwhile, Freeland unveiled targeted stimulus programs that aim to keep Canadian clean tech firms from heading south to take advantage of the massive tax credits available in Joe Biden’s Inflation Reduction Act. Nobody knows yet if the Canadian budgetary measures will do what is necessary to stop capital flight, and Canadians are nervous.
Freeland gave her speech as the World Bank and IMF held their spring meetings, but an important part of her message seemed to be targeted at U.S. leaders: “No single country – not even the United States – can invent all of the new technologies, or possess all of the natural resources, that the net-zero global economy requires,” she said.
US Treasury Secretary Janet Yellen spoke last year about friendshoring and the need for “trusted trade partners” to work together to bolster supply chains. But Washington’s industrial policies and subsidies make it hard to know whether Yellen or Freeland’s message will convince American decision-makers to include Canada in its plans for a clean tech future.
“How this plays out,” writes The Globe’s David Parkinson, “will say a lot about whether friendshoring is a realistic path for global trade. Or, alternatively, expose it as a well-meaning step on a slippery slope to a more protectionist future.”
Buddy Biden and budget: Enough to boost Trudeau?
Whatever else Joe Biden accomplished in his recent visit to Ottawa, he helped his friend Justin Trudeau change the channel away from a damaging scandal about Liberal inaction in the face of Chinese election interference.
The scandal, which the Liberals had handled with customary awkwardness, was running out of steam anyway. But Biden’s arrival and the 2023 budget that followed gave Trudeau the opportunity to shift attention from whatever it was they didn’t do in the past about Chinese meddling to what they will do in the future with their friend Joe.
The big announcement? A deal to amend the Safe Third Country Agreement, which allowed Canada to close the irregular border crossing at Roxham Road. This removes a huge political irritant for Trudeau, who must keep Quebecers onside if he is to win another election.
But on the big economic question — how Canada will respond to Biden’s massive Inflation Reduction Act — the Liberal plan may not keep businesses from heading south to take advantage of enormous incentives Washington is handing out to anyone with a clean energy project.
Canadian Finance Minister Chrystia Freeland, who wrote her budget with New Democratic Party Leader Jagmeet Singh looking over her shoulder, described the economic plan as fiscally prudent, but nobody calling for prudence thinks that’s what she delivered. The budget projects increased spending and a final departure from the government’s own fiscal guardrails.
Bay Street (Canada’s financial sector) seems unimpressed, but Freeland appears to have had little choice but to go deeper into the red, given the need to keep Singh onside and respond to the IRA.
The Canadian government is rightly nervous about this $350-billion package, which offers huge open-ended tax credits for clean energy projects, raising the fear of capital flight south. In Ottawa, Biden talked about the benefits to Canada of closer integration of the two economies, pointing to jobs in Canada packing semiconductors that are produced in the United States. But there are other sectors he didn’t mention, such as biofuels, that are exposed to American inducements.
In the budget, Freeland announced 16.4 billion Canadian dollars ($12.1 billion) in tax credits for clean tech and billions more for the Canada Growth Fund and the Canada Infrastructure Bank, all with the goal of jumpstarting clean tech projects in Canada. But even when planning to spend so much that Bay Street economists are grumbling, it’s not clear it will be enough to prevent capital flight.
The government will argue that the investment tax credits are big enough to stop companies from leaving, but that may not be true, says Rachel Samson, vice president of research at the Institute of Research for Public Policy.
“I’m not sure that that’s quite the case. I think a lot of investors would like that production tax credit, which pays per unit of product produced. That provides a lot of certainty on the return from investment. But from a government point of view, that’s fiscally risky.”
The industrial measures in the budget are “too late in the game,” says Robert Asselin, senior vice president for policy at the Business Council of Canada and a former budget director for former finance minister Bill Morneau.
The government ought to have laid the groundwork for this moment in last year’s budget, he says. “Here we are two years later trying to come up with tax credits that are generally good, but as a fulsome response from the government, hard to measure as a whole.”
The upside for the government is that the opposition Conservatives don’t know whether to support or oppose the industrial measures, although they are sure the government is spending too much money.
It may all be clearer when the government eventually gets around to putting flesh on the bare bones in the budget.
Gerald Butts, vice chairman of Eurasia Group and former principal secretary to Trudeau, says two questions remain: “How are you going to ensure all of this new policy achieves its objective, which is to prevent money leaving Canada to the United States? And, more importantly, how do you ensure it is funding decarbonization?”
Biden, Trudeau, and Freeland have changed the channel. It doesn’t mean Canadians will approve of the new program.
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U.S. President Joe Biden speaks with Canada's Prime Minister Justin Trudeau as they meet during the Ninth Summit of the Americas in Los Angeles, California, U.S., June 9, 2022.
US green subsidies pushback to dominate Biden's Canada trip
As Ottawa prepares for a two-day visit by President Joe Biden starting Thursday, Canadians have been speculating about whether he will do something to stop the northward flow of border crossings by undocumented migrants at Roxham Road, Quebec.
That problem is grabbing headlines, but it is nothing next to the border challenges the Americans face, and the Canadians likely have more important requests for Biden. Behind the scenes, the government is focused on getting Americans to help mitigate the impact of the Inflation Reduction Act, the largest climate spending package in US history, which could lead to the loss of capital and jobs from Canada.
The $350 billion IRA stimulus package is a challenge to both Canada and Europe, with subsidies and open-ended tax credits that offer huge savings to clean-technology companies that shift their operations to the United States. It is expected to be a game-changer for emission reductions, but also a threat to allied countries who can’t match the Americans’ spending power.
European Commission President Ursula von der Leyen was in Washington this month to try to come to terms with the Americans over the nature of the threat, and the EU appears poised to match American incentives. That will come too late to save a Volkswagen battery plant that had been planned for Eastern Europe.
Not coincidentally, the German auto giant just announced plans to build a battery plant in St. Thomas, Ontario, where it can benefit from American subsidies because the auto industry is covered by the United States-Mexico-Canada Agreement. That looks like a big win for Canada, but … other sectors do not enjoy the same protection, which means that companies – Canadian and foreign firms in Canada in the manufacturing, green energy, and petroleum sectors – may be tempted to move south of the border to take advantage of generous tax credits.
Canada can’t afford to woo these businesses in the same way, so it needs to match US subsidies in key sectors while also asking the Americans, very politely, to play nice.
“The IRA is the biggest piece of industrial policy coming out of the United States for a very long time, and everybody else is now adjusting to that, and [Canadians] are distinctly exposed,” says Graeme Thompson, a Eurasia Group senior analyst. “All gears are firing in Ottawa to manage the challenge that poses to competitiveness so that the US doesn't just suck up all of the investments that we'd otherwise be after.”
That task is front of mind for Canadian Finance Minister Chrystia Freeland, who will present her third budget four days after Biden leaves. Prime Minister Justin Trudeau’s government likely sees the two events as a one-two punch, an opportunity to wrest control of the headlines for a few days.
Biden’s visit gives Trudeau an opportunity for positive messaging. For Gerald Butts, vice chairman of Eurasia Group and former principal secretary to Trudeau, the government likely hopes to change the channel from the China election interference story, which has dominated the news in Canada for weeks.
“They've clearly got a bunch of stuff lined up where they want to make some announcements there and then run into the budget,” he says. “I think what they're hoping to do, obviously, is get control back of the communications agenda from this crazy China stuff.”
So it’s clear what Biden can do to help Canada. But what can Canada do for him?
Freeland has previously promoted US Treasury Secretary Janet Yellen’s notion of “friendshoring,” building supply chains in allied economies. Her exact plans remain unknown, but Canada can offer the Americans access to critical minerals vital to green energy — like lithium and copper — and take steps to streamline approval for mining projects, although Indigenous land rights may make it impossible to go as quickly as industry would like.
Biden is also seeking more help in Ukraine and Haiti. The US wants Ottawa to play a lead role in planning for Ukraine’s reconstruction, which is reasonable. But nobody thinks Canada will do what Biden wants and put peacekeepers on the ground in Haiti, where gangs have turned the national capital into a hellscape. On the other hand, a lack of action will likely lead to even more desperate migrants heading north – a political problem for both governments, which brings us full circle to migration.
Trudeau wants the US to renegotiate the terms of the Safe Third Country Agreement, which requires that asylum-seekers who cross select parts of the US-Canada 5,525-mile border be sent back to the country where they first entered. Trouble is, this encourages migrants to enter at irregular crossings, such as Roxham Road, and once they’re in Canada, they can legally make asylum claims. The Americans have been noncommittal, and they point to uncontrolled irregular crossings in the other direction: Mexicans who can fly into Canada without a visa and then make a short river crossing to the United States.
From the US perspective, Canada is not doing its part, says Christopher Sands, director of the Wilson Center’s Canada Institute.
“We have problems on both our borders,” he says. “You think your border's better, but we both have illegal crossers and we are just as mad about all of them. You're not any better than the Mexicans. We should get better co-operation from you. It's been one of those debates.”
Biden isn’t likely to renegotiate the STCA unless Canada agrees to do more to control the traffic going the other way, and maybe agrees to take more migrants from Central America.
“I think it's gonna be very tough for the president to do much when he's in Canada,” Sands says.
On the other hand, Trudeau and Biden are progressive political allies, and both are struggling with lackluster approval ratings, so they may want to make some deals and show progress on issues that matter on the ground to voters in both countries.
Fun fact: Biden is the first president to spend a night in Ottawa since George W. Bush came north to thank Canada for its help after 9/11. He’s likely not spending so much time — a precious commodity for the world’s most powerful man — without intending to do something that matters.
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