Tariffs Are Exposing Canada’s Deeper Economic Weaknesses

September 4, 2025 – The US tariff threat has exposed the fragility of Canada’s economic model, built on deep reliance on its southern neighbour. But tariffs are only the latest shock. Woeful productivity growth, high public debt, and a tax system that discourages growth have been weighing on the Canadian economy for years, according to a new Verbatim from the C.D. Howe Institute.

In “Shaken by Tariffs, Still Weak from Within: Canada Needs a New Economic and Fiscal Model,” Don Drummond, Fellow-in-Residence at the Institute and Stauffer-Dunning Fellow at Queen’s University, warns that Canada is ill-prepared to make the transformation to a robust economy less dependent upon the US because it has failed to tackle these long-standing weaknesses. Now, simultaneously, we must find new markets, strengthen the domestic market, and rid the economy of old baggage.

Canada’s GDP per capita has slipped from above the Organisation for Economic Co-operation and Development’s (OECD) average to the average, and the OECD projects Canada will record the weakest growth in GDP per capita among member countries through 2060. Drummond says business investment in machinery, equipment, and intellectual property has lagged far behind US levels, while research and development remains weak. Meanwhile, on the fiscal side, both federal and provincial governments carry heavy debt loads, and Canada’s tax structure relies disproportionately on income and profit taxes rather than less growth-damaging consumption taxes.

Drummond cautions that each strand of Prime Minister Mark Carney’s promised economic transformation will be compromised if successful approaches are not brought to old problems. Ambitions to boost domestic production, develop Canadian expertise, strengthen investment and expand into new markets will falter, he argues, unless productivity and competitiveness improve and domestic trade barriers are eliminated.

“Canada faces a crisis emanating from the US tariff threat – but it should not distract us from the deeper, longer-standing weaknesses that continue to undermine our economy,” says Drummond. “We must diversify and build greater economic resilience to reduce our dependence on an increasingly unreliable partner, while also addressing the baggage we have carried for a long time, including weak competitiveness and productivity, as well as fiscal policy that is anti-growth. The government must not just deal with the crise-du-jour; it must also fix many wrongs of history.”

Read the Full Report

Earlier this year, Drummond, William B.P. Robson, and Alexandre Laurin developed the Institute’s 2025 Shadow Budget. It responds to Canada’s long-standing fiscal challenges and immediate threats with a federal budget focused on defence, budget surpluses, and a falling debt burden, as well as growth-enhancing tax relief for Canadians. Read their full report here.

For more information, contact: Don Drummond, Fellow-in-Residence, C.D. Howe Institute; Percy Sherwood, Associate Editor and Communications Officer, C.D. Howe Institute, 416-407-4798, psherwood@cdhowe.org.

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada’s most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.

Want more insights like this? Subscribe to our newsletter for the latest research and expert commentary.