America’s post-election political gridlock could hurt Canada’s economy: Fraser Institute

VANCOUVER—Policy uncertainty and so-called “political gridlock” in the United States following last year’s election could hinder economic growth in Canada, the Fraser Institute warns.

A new series of essays from the think-tank covers a variety of geopolitical topics ranging from currency disparity to tax rates, outlining potential cause and effect that could resonate on Canadian soil.

“While Canadians are not allowed to vote in U.S. elections, our fortunes and prosperity are intimately affected by the electoral decisions of our American neighbours,” Fraser Institute executive vice-president Jason Clemens said in a statement.

“Polls in Canada consistently show overwhelming support for President (Barack) Obama, but his re-election combined with a divided Congress and the policies likely to be implemented over the next four years present a number of real, immediate risks to Canada—as well as opportunities.”

Made up of 10 essays from preeminent Canadian and American scholars, the series examines critical economic issues that underpin the Canada-U.S. relationship.

In Canada’s Challenges in the Face of U.S. Monetary Policy by former Federal Reserve Bank of Cleveland president Jerry Jordan, the author warns of challenges ahead for Canadian firms should U.S., European and Japanese currencies depreciate.

According to the author, continued appreciation of the Canadian dollar against the U.S. dollar will mean increasing competitive pressures on both Canadian industries and firms that seek to export, and on Canadian companies that must compete with foreign imports.

“Such currency challenges often lead to worsening policy responses such as trade protectionism,” Jordan said.

The re-election of President Obama means the full implementation of what is popularly referred to as the Dodd-Frank Act, according to Moin Yahya’s essay The Effect of U.S. Financial Market Regulation on Canada, which imposes new regulations on the financial services sector in the U.S.

Yahya argues that the impact of Dodd-Frank and its accompanying regulations on the Canadian financial system is highly uncertain because specific provisions concerning foreign banks have yet to be developed.

Other rules may apply inadvertently to Canadian companies doing business in the U.S., such as brokerage firms that trade American stocks for clients in the U.S. or Canada.

“Clearly, there will be adverse effects on the Canadian banking and financial services sector from the regulations imposed by U.S. legislators,” Yahya said.

In U.S. Energy and Environment Policymaking in Obama’s Second Term, author Chris Horner from the Competitive Enterprise Institute warns the impending introduction of a bevy of environmental and safety regulations in the inudstry south of the border could adversely affect production on home soil.

“The risk for Canada if it copies American energy regulations is that it will inadvertently impede the development of its own opportunities,” Horner said.

How Canada Could Take Advantage of Changes to U.S. Tax Policy by David R. Henderson outlines the competitive disadvantage Canadian income earners face relative to their American counterparts with respect to income taxes.

According to Henderson, Canadians face higher income tax rates that kick in at lower levels of income compared to Americans.

This presents an opportunity for Canada over the next decade or so: balance budgets then reduce personal income taxes.

“Income taxes are the largest source of revenues for governments and the single largest tax for the top 50 per cent of income earners,” Henderson said. “Continued deficits will prevent the U.S. from implementing sustainable tax relief over the next decade.

“This provides Canada with an opportunity to gain some level of comparability if not a competitive advantage vis-à-vis the U.S. with respect to income taxes.”

To learn more about the series log on to www.fraserinstitute.org.