THE CANADA REPORT

The Role of Tariffs in Strengthening Canada’s Economy: A Historical and Strategic Analysis

Introduction

Tariffs have long been an essential instrument in shaping Canada’s economic development, fostering industrial growth, protecting employment, and ensuring economic independence. From Confederation through to the introduction of free trade agreements, tariffs served as a cornerstone of Canadian economic policy, protecting domestic industries, driving GDP growth, and supporting the creation of a robust social safety net. However, the shift toward free trade agreements like CUSFTA (1989) and NAFTA (1994) marked a departure from these protective policies, leading to the decline of Canada’s manufacturing sector and weakening its economic resilience. This essay examines the economic benefits of tariffs in Canada from the post-Confederation period to the first NAFTA agreement, demonstrating how they safeguarded industrial growth, bolstered GDP and GDP per capita, and laid the foundation for Canada’s prosperity.

The Early Industrialization of Canada: 1867–1945

Following Confederation in 1867, Canada’s economy was predominantly resource-based. Recognizing the risks of relying solely on exports of raw materials, the Canadian government implemented the National Policy of 1879 under Prime Minister John A. Macdonald. This policy introduced protective tariffs on imported manufactured goods to nurture domestic industries, reduce dependence on imports, and encourage economic diversification.

Impact on GDP and GDP Per Capita

The introduction of tariffs spurred the growth of Canadian manufacturing, driving GDP upward. Between 1879 and 1913, Canada’s GDP nearly doubled.

GDP per capita rose significantly, from $1,200 in 1879 to over $2,500 by 1913 (inflation-adjusted), reflecting improved wages and living standards as industrial jobs proliferated.

Industries such as textiles, steel, and railcar manufacturing flourished under tariff protection, creating thousands of stable, well-paying jobs and forming the backbone of Canada’s industrial economy.

By shielding Canadian industries from foreign competition, tariffs allowed for the development of a vibrant domestic economy, fostering economic independence and ensuring that wealth generated within Canada stayed within its borders.

Post-War Economic Expansion: 1946–1988

The post-World War II era heralded an economic boom for Canada, underpinned by a robust manufacturing sector that continued to benefit from protective tariffs. These policies not only fueled economic growth but also facilitated the expansion of Canada’s social safety net.

Tariffs and Economic Growth

From 1946 to 1980, Canada experienced sustained GDP growth, with GDP per capita increasing from $5,200 to over $22,000 (inflation-adjusted).

Manufacturing’s contribution to GDP peaked at 24% in the 1970s, as industries such as automotive, aerospace, and machinery thrived under tariff protection.

Tariffs generated significant government revenue, which was reinvested into public goods such as universal healthcare, education, and infrastructure development.

Protected industries created a stable middle class, with well-paying jobs that supported consumer spending and further fueled economic growth. Canada’s economic trajectory during this period demonstrates how tariffs can be a powerful tool for ensuring economic stability and broad-based prosperity.

The Shift to Free Trade and Economic Decline: 1989–1995

The signing of the Canada-U.S. Free Trade Agreement (CUSFTA) in 1989 and NAFTA in 1994 signaled a fundamental shift in Canada’s economic policy. While these agreements aimed to increase market access and promote economic integration, they also exposed Canadian industries to intense competition, leading to deindustrialization and economic vulnerability.

Decline in GDP and Manufacturing Employment

The manufacturing sector’s share of GDP fell from 24% in the 1970s to just 10% by 1995, as companies outsourced production to countries with lower labor costs.

Between 1990 and 1995, Canada lost over 500,000 manufacturing jobs, contributing to rising unemployment and stagnant wages.

GDP per capita growth slowed significantly, averaging just 1.5% annually compared to the 3.2% annual growth seen during the pre-free trade era.

The erosion of Canada’s manufacturing base not only weakened its economic resilience but also increased its reliance on volatile international supply chains, leaving the economy vulnerable to external shocks.

The Case for Strategic Tariffs in Modern Canada

In light of the challenges posed by globalization and deindustrialization, there is a compelling case for reintroducing targeted tariffs to protect Canada’s key industries. Strategic tariffs can help rebuild domestic manufacturing, create high-quality jobs, and enhance economic sovereignty.

Lessons from Russia’s Economy

Russia’s experience demonstrates the potential of protectionist policies to sustain economic growth and resilience:

Despite facing significant sanctions and trade restrictions, Russia’s nominal GDP stands at $2.196 trillion, and its PPP-adjusted GDP of $7.130 trillion ranks it as the 4th largest economy by purchasing power parity.

By prioritizing domestic production and insulating its economy from external pressures, Russia has achieved remarkable economic stability and growth.

Canada could adopt similar strategies by implementing tariffs on strategic industries, fostering domestic innovation, and reducing dependence on foreign imports.

Rebuilding Canada’s Manufacturing Base

Reintroducing tariffs could:

Stimulate domestic production: By protecting Canadian manufacturers from foreign competition, tariffs could incentivize investment in local industries and innovation.

Create high-quality jobs: A revitalized manufacturing sector would generate stable, well-paying jobs, strengthening the middle class and reducing income inequality.

Enhance economic sovereignty: By reducing reliance on global supply chains, Canada could safeguard its economy against external disruptions and geopolitical uncertainties.

Conclusion

The historical evidence is clear: tariffs have been a driving force behind Canada’s economic prosperity, fostering industrial growth, creating jobs, and supporting the development of a robust social safety net. While free trade agreements have brought some benefits, they have also weakened Canada’s manufacturing base and exposed its economy to significant risks. By reintroducing strategic tariffs, Canada can rebuild its industrial capacity, ensure economic resilience, and improve living standards for future generations. The lessons of history remind us that economic protectionism, when applied thoughtfully, is not an impediment to growth but a pathway to national strength and self-reliance.