Canada’s Trade Problem Is a Productivity Problem

From: Parisa Mahboubi and Tingting Zhang
To: Economy observers
Date: July 28, 2026
Re: Canada’s Trade Problem Is a Productivity Problem

When Canada went into its first review of the Canada-United States-Mexico Agreement (CUSMA), the debate centred on tariffs, market access, and potential job losses.

Those concerns are well-founded. More than 70 percent of Canadian merchandise exports go to the United States, accounting for more than 2.5 million Canadian jobs, with many more linked to services trade. The stakes are enormous. But tariffs are not Canada’s deepest vulnerability. Persistent weak productivity growth is, and the tariff shock is making it worse.

For decades, Canada has lagged its peer countries – especially the United States – in output per hour worked (labour productivity), contributing to a widening prosperity gap. In recent years, slower productivity growth in Canada has contributed to a growing GDP per capita gap relative to the United States, making the challenge increasingly acute.

The introduction of US tariffs in early 2025 had a significant negative impact on affected businesses and may further weaken Canada’s productivity performance, given that trade-exposed firms tend to be more productive than non-exporters. And exporting, in turn, spurs further innovation, technology adoption, and efficiency gains.

Between 2019 and 2024, labour productivity growth in industries dependent on US demand outpaced that of other business-sector industries.

Among goods-producing industries employing more than 20,000 Canadians, miscellaneous wood manufacturing recorded productivity growth of 38.4 percent during that period, followed by conventional oil and gas extraction (37.5 percent), greenhouse production (36.9 percent), pharmaceutical and medicine manufacturing (25.5 percent), and animal production (24.8 percent), standing out as the brighter spots in an otherwise dim national picture.

Overall, business-sector labour productivity in Canada, measured in 2017 constant dollars, stood at $58.20 per hour in 2019 and had barely increased to just $59.20 per hour by 2024, a comparison which excludes the temporary pandemic-era spike caused by the composition effects. The picture did not improve in 2025: Business-sector productivity was essentially flat over the year, as business-sector goods productivity weakened and trade uncertainty continued to weigh on investment and efficiency.

Yet many trade-exposed firms have been vulnerable to the tariff shock. By the first quarter of 2026, more than half of Canadian manufacturers reported being negatively affected by US tariffs over the preceding year, well above the all-business average of 32.2 percent. Manufacturing productivity fell 3.4 percent between early 2025 and 2026, coinciding with last year’s escalation of US tariffs.

Meanwhile, manufacturing employment has dropped by roughly 48,000. That pattern runs counter to what is normally expected: When a sector sheds workers, productivity improves as less efficient capacity exits. But when firms simultaneously freeze investment, the workers who remain are producing with aging capital. Therefore, they are not becoming more efficient – they are falling further behind. Business investment in Canada has been persistently weak, and trade uncertainty is making it worse.

This is why waiting for trade tensions to ease is not a strategy.

Some will argue these losses are temporary: Once trade tensions ease, investment will return. That underestimates the challenge. In the fourth quarter of 2025, between 30 and 40 percent of manufacturers reported the tariffs were having a major negative impact. Most firms said they would limit spending to routine maintenance over the next 12 months.

Delayed investment is not neutral; it compounds. Every year of postponing equipment upgrades or new technology adoption lets competitors pull further ahead. The productivity gap does not pause while Canada negotiates. And protracted CUSMA talks could entrench the very uncertainty that is keeping firms from investing.

This matters because productivity growth is the only sustainable source of rising real incomes in the long run. Canada’s GDP growth in recent years has been driven mostly by population growth, not by gains in output per worker. On a per capita basis, Canadians have been poorer. And the uncertainty ahead could place further pressure on productivity growth. What happened in 2025 may be the tip of an iceberg.

What Canada needs alongside trade stability is a domestic productivity agenda pursued with the same urgency now devoted to CUSMA negotiations. That means accelerating business investment in machinery, equipment, and technology – areas where Canada has chronically underperformed.

For too long, Canada has tolerated policies that discourage investment and shield incumbents from competition. Reversing that trend requires improving the investment climate through competitive income tax rates, reducing red tape, streamlining regulations, and enhancing competition. Research suggests that removing regulatory barriers to competition could boost productivity and expand Canada’s economy by up to 10 percent over the long term.

The CUSMA uncertainty will continue to dominate headlines in the weeks ahead. But the negotiation Canada most urgently needs is not just with Washington. It is also with itself, about whether it is willing to treat productivity growth as the economic emergency it has become.

Parisa Mahboubi is an Associate Director of Research at the C.D. Howe Institute, where Tingting Zhang is a Policy Analyst.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.

A version of this Memo first appeared in The Hill Times.