US election effects to be outweighed by other factors - Capital Economics
Canada Economics

US election effects to be outweighed by other factors

Canada Economics Update
Written by Stephen Brown
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A Democratic clean sweep in the US election is probably the scenario that would be most beneficial for Canada’s GDP, but the effects would still be far outweighed by other factors.

  • A Democratic clean sweep in the US election is probably the scenario that would be most beneficial for Canada’s GDP, but the effects would still be far outweighed by other factors.
  • The US election has the potential to impact the Canadian economy through three key areas: trade policy, regulation and taxation & spending. As we set out in our US Focus which outlines the policy approaches the candidates might take, Joe Biden is likely to be far less antagonistic than President Donald Trump on trade. Nevertheless, the consequences of US trade policy for Canada seem likely to be far smaller under either candidate than was the case during Trump’s first term. Trump is unlikely to use a second term to rip up the Canada-US-Mexico Agreement (CUSMA) that his administration spent years negotiating, so we suspect future actions against Canada would be similar to the recent threat to put tariffs on aluminum imports. While Biden would probably seek an international consensus against unfair trade practices elsewhere, this would not preclude his administration taking similar directed actions against imports from Canada. For example, the previous Democratic administration imposed tariffs on softwood lumber imports from Canada. Either way, the effects of product-specific tariffs on overall GDP tend to be very small.
  • Tax hikes and regulatory changes under Biden could boost Canada’s competitiveness. Canada’s federal-provincial corporate tax rate of 27% was far lower than the 35% equivalent rate in the US until Trump’s 2017 tax cuts, which pulled the federal corporate tax rate down by 14%-points. Biden wants to reverse half that move and also reverse some of the cuts to the personal tax rate for high earners. These changes would move the scales in Canada’s favour when it comes to firms deciding where to locate and enable Canadian firms to compete better on costs, although the immediate macroeconomic effects are also likely to be small.
  • Changes to antitrust and immigration rules under Biden could have offsetting effects for Canada’s tech sector. While we are not convinced that Biden will pursue the antitrust legislation that some have suggested will lead to the break-up of the big tech firms, if he did this could benefit the industry in Canada. The immediate effects of a Biden win on Canada’s tech sector could be negative, however, if he quickly reverses Trump’s immigration restrictions that have made it harder for US tech firms to get visas for foreign workers. These restrictions appear to have made it much easier for Canadian tech firms to expand their operations.
  • Biden also presents upside and downside risks to the energy sector. A Biden administration seems more likely to impose environmental regulations that could limit the growth of the US shale oil industry and allow Canadian firms to capture market share, but Biden’s pledge to cancel the presidential permit for the Keystone XL pipeline could hamper the Canadian oil industry over the longer term.
  • The largest effect of the election could come from a US fiscal stimulus, but even here the outcome may not be as transformative as many seem to think. Even if the Democrats capture the Senate, they would fall short of a filibuster-proof majority, which means any needed near-term stimulus might have to wait and be incorporated with Biden’s long-term plan. The latter is ambitious, with $4trn to $5trn in new spending, but that would be partly offset by tax increases. So the stimulative effect for the US, and therefore the spill-over effects for Canada, may not be as large as is widely assumed. (See our US Update.) Moreover, the positive effects for Canada could be dampened by the “Buy American” clauses that form part of Biden’s plan, particularly considering Canada failed to gain an exemption from similar rules during the financial crisis when Biden was vice president. In any case, our calculations suggest a stimulus that boosted US GDP by 1% would raise Canada’s GDP by just 0.1%, so it would take a very large package to meaningfully alter our forecasts for Canadian GDP growth of 5.7% in 2021 and 3.7% in 2022.
  • The upshot is that Biden’s policy proposals could have the greatest benefits for Canadian GDP growth, but it will probably take years for any material effects to be felt. While the direct impact of even a Democratic clean sweep look set to be modest, one indirect effect to consider is how US policy changes could affect policy in Canada. If a Democratic Congress passes the large spending plan that Biden is campaigning for, it could make it more likely that politicians in Canada eventually do something similar.

Stephen Brown, Senior Canada Economist, +1 416 874 0514,