G-20 Nations Should Look to Canada for How to Build a Better Economy

Leaders from 19 countries and the European Union will gather for the G-20 summit in Toronto beginning June 26 to discuss how to stem the global recession and get the world back on the path to strong, stable economic growth. They picked a good spot, as the assembled leaders could learn a lot from their host country.

Since the global recession hit two years ago, Canada has implemented a broad array of free market tax and trade policies. As a result, our neighbor to the north has surpassed an increasingly statist, mercantilist United States in The Heritage Foundation’s Index of Economic Freedom. More importantly, Canada is emerging from the “Great Recession” much more rapidly than the U.S. and virtually every other G-20 participant as well.

How has Canada done it? At the onset of the recession, Prime Minister Stephen Harper’s government moved aggressively to improve Canadian manufacturers’ global competitiveness. After extensive consultations with Canadian industries, Ottawa unilaterally eliminated tariffs on 1,755 different types of machinery, equipment and other manufacturing materials.

The Department of Finance presented a straightforward rationale for the move: “By reducing the cost of importing key factors of production, tariff relief encourages innovation and allows businesses to enhance their stock of capital equipment.” The Department projected that Canada’s complete liberalization of more than C$5 billion in imports will provide an additional C$300 million in annual duty savings for Canadian businesses.

Canada didn’t stop with tariffs. It also slashed the corporate tax rate to 18 percent. And the rate will fall farther -- to 16.5 percent next year and to 15 percent a year later.

The Harper government reasoned that such tax cuts would help make Canada one of the world’s most attractive destinations for international business investment. And they certainly have a point: Canada’s 2010 marginal effective tax rate is more than 16 percentage points lower than the United States’ 34.2 percent rate and two points below the OECD average.

And Canada has pursued free trade agreements (FTAs) with a passion. While fully negotiated FTAs with Colombia, Panama and South Korea lie moldering in the Obama White House, Canada signed its agreement with Colombia in 2008. Its House of Commons and its Senate have overwhelmingly passed the deal; it’s expected to be signed into law very soon. Canada also inked an agreement with Panama in May, and is actively negotiating FTAs with Korea and nine other U.S. trading partners.

In addition to modeling exemplary behavior on tax and trade policy, Canada has taken the high road on another G-20 agenda item: global currency issues. When times are tough, politicians are prone to blame their woes on other nations. Hence, we’ve heard a lot of overheated rhetoric from U.S. lawmakers arguing that China’s allegedly undervalued currency is dragging down U.S. competitiveness. If only China would revalue the yuan, they suggest, U.S. factories would have to add shifts to meet new demand for their previously uncompetitive goods.

In contrast, Canadian Trade Minister Peter Van Loan discusses Chinese currency valuation in a calm, rational and completely apolitical fashion. Here, he’s following the pragmatic lead established by Harper when faced with the devaluation of another global currency -- the U.S. dollar. The Canadian dollar continues to strengthen against the greenback, yet Harper steadfastly refuses to intervene with an artificial revaluation. Such matters, he says, are “outside the purview of the government of Canada, outside the responsibilities of the prime minister.” Instead, he focuses on helping Canadian businesses adjust to a stronger Loonie by pursuing the aforementioned tax and trade policies that can make them more globally competitive.

Canada’s free market approach is yielding impressive results. For the first quarter of 2010, Canada’s GDP grew at an annualized rate of 6.1 percent—far exceeding expectations and double the U.S. growth rate during that period. Moreover, Canada’s unemployment rate is now approaching pre-recession levels. Investment is rising too; Canada is the first of the G-7 countries to raise interest rates.

It would be disingenuous to credit all of Canada’s economic success to its international economic policies, but these measures certainly deserve some of the praise. Indeed, they look particularly wise in comparison to the contrary efforts -- and continuing economic malaise -- of the United States.

So when the world’s economic leaders gather in Toronto next week to discuss how to escape the “Great Recession,” they should break with the past. Because these days, the best guide comes from the north in the nearby capital of Ottawa, not that more famous one to their south.

James M. Roberts is a research fellow in the Center for International Trade and Economics at The Heritage Foundation (www.heritage.org). Scott Lincicome, an international trade attorney at White & Case, LLP, blogs on trade issues at http://lincicome.blogspot.com. The views expressed are his own.