Canada has lost its competitive advantage over the U.S.

Say you are a store owner and your competitor across the street offers everything at lower price and higher quality, well, you’re in trouble. If your competitor was far on the other side of the city, things might be a bit better. But across the street?

That is roughly where Canada finds itself in relation to the United States. This year for the first time since 2008, the U.S. topped the just-released World Competitiveness Forum’s highly-respected Global Competitiveness Index (GCI). Canada ranked 12th out of 140. In other words, we’re at a significant disadvantage to the country across the border.

The 2018 report is not directly comparable with previous years due to changes in methodology which put increased emphasis on innovation, where the U.S. remains world champion. However, the CGI recalculated last year’s scores using the new methodology, revealing a troubling trend. Canada’s rank declined from 10th last year while the U.S. would have been first.  

Even using last year’s methodology, with little innovation weighting, the U.S. ranked 2nd while Canada was down at 14th. As the report notes: “The U.S. has been on an upward path for some years.”

The report warns U.S. competitiveness could be damaged by trade tensions. But so could Canada’s. The first shots may have been fired by the U.S., but past experience shows a few shots can erupt into a global trade war, harming everyone.

How has the U.S. made itself more competitive? Deregulation has been an important part of the story. Regulation is a balancing act—the optimal level of regulation is not zero. However, unnecessary complexity, hurdles, delays, and uncertainty should be eliminated wherever practical. Canada is far from there. What’s more in recent years, the federal government and most provincial governments have failed to offer any significant deregulation strategy to keep the country competitive.

There are troubling signs things could get still worse.

For example, the grave uncertainty over the Trans Mountain Pipeline has alarmed domestic and international investors, and made it seem even more difficult (perhaps impossible) to complete major energy infrastructure projects in Canada’s current regulatory climate. Canada has struggled to attract business investment in recent years, and developments such as uncertainty surrounding Trans Mountain threatens to make things even worse.

Then there’s the issue of government debt and macroeconomic stability. The current CGI ranking shows Canada closely clustered with a number of other countries at the top of the global rankings. For example, Canada earns a score of 100 out of 100, but the U.S., ranked 34th, has a score of 99.6. In other words, rich countries not facing imminent fiscal crunches all are awarded perfect or nearly perfect scores in the index.

It’s important to remember, however, that Canada’s fiscal outlook has deteriorated substantially since 2016, the year when much of the macroeconomic data were collected. Back then, the extent of the federal government’s structural deficit was still not clear, Alberta’s big run-up in debt was barely underway, and Ontario seemed to be making progress on deficit reduction, which has since proved illusory.

On all these fronts, things have gotten much worse since 2016 and Canada is now on a dangerous fiscal path. Ottawa is in no hurry to put its fiscal house in order. Alberta and British Columbia are becoming spendthrifts. Ontario’s new government inherited a fiscal mess and has yet to announce plans to bring spending under control. The U.S., with large tax cuts, faces fiscal challenges, too, but that doesn’t mean Canadians should not be vigilant.

In short, the U.S. is cutting taxes and regulatory red tape, while here in Canada, income tax rates have been creeping in the other direction. Far from launching rational deregulation, Canadian governments are gumming up the works and sowing uncertainty. In other words, the store across the street is reducing prices and making shopping easier while we are doing the opposite.