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The Economy of Canada

Canada is the second largest county in the world in terms of land area. Its total area is

approximately 3,855,000 square miles or 9,985,000 square kilometers [ CITATION Bec16 \l

1033 ]. As of 2016, Canada’s population was at approximately 36,290,000 [ CITATION Cou16 \l

1033 ]. Canada is a bilingual nation, communicating in English and French as a reflection of the

country’s history as they were once under the two of Europe’s great powers. Canada has

developed into what many consider to be a model multicultural society, welcoming immigrants

from all over the world. As a member of the Organization for Economic Co-operation and

Development Group (OECD), Canada is known as one of the richest nations in the world.

They produce and export various goods and services including natural forest products,

manufactured items including automobiles, oil and minerals. In addition, Canada harbors and

exports an amount of natural resources and intellectual capital equaled by few other countries.

Canada is a large self-rule nation, but matters pertaining to international diplomacy and military

alliances were reserved to the British crown. Canada evolved into a self-governing country

within the British Empire in 1931 however, full legislative independence was not achieved until

1982, when Canada obtained the right to amend its own constitution [ CITATION Ral18 \l 1033 ].

I. International Trade

International trade is the purchase and sale of goods or services between residents of different

countries. According to [ CITATION Phi16 \l 1033 ] in 2015, exports accounted for 31.5% of

Canada’s GDP, while imports were 33.8%. Both imports and exports are beneficial to economic

growth. Firms in Canada that export have significantly higher productivity than firms that don’t.

Imports of intermediate inputs contributed to over half of Canada’s recent productivity growth.
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In 2016 Canada exported $387 billion worth of products, making them the 12th largest

exporter in the world. The most recent exports are led by Cars which represent 12.6% of the total

exports of Canada, followed by Crude Petroleum, which account for 10.2% and then gold which

is 5.2%. The top export destinations of Canada are the United States ($296B),

China ($15.8B), the United Kingdom ($12.9B), Japan ($8.09B) and Mexico ($5.76B). Following

[ CITATION Dan18 \l 1033 ], 77.4% of Canadian exports were delivered to its North American

Free Trade Agreement (NAFTA) partners United States and Mexico. Canada exports

approximately 242 products with revealed comparative advantage.

In 2016 Canada import total was $399 billion, making it the 9th largest importer in the

world. Canada’s leading imports are cars at 6.6%, vehicle parts which is 5.1%, and delivery

trucks which is 3.3% of their total imports. Most of Canada’s imports are coming from the

United States ($266B), China ($27.3B), Germany ($10.6B), Mexico ($10.4B)

and Japan ($8.16B) (OEC). 58.4% of Canada’s total imports in 2017 were purchased from the

other members of NAFTA.

When looking at Canada’s international trade commercial policy, there are various

agreements that come into place for the better flow of trade such as Canada-U. S. Free Trade

Agreement, North America Free Trade Agreement (NAFTA) and the World Trade Organization

(WTO). The United States commenced bilateral trade negotiations with Canada on January 1,

1989 which resulted in the U.S.-Canada Free Trade Agreement. In 1991 the U.S. and Mexico

began bilateral taking, shortly after Canada get involved. NAFTA was then formed on January 1,

1994. The perks of this agreement were tariffs were gradually eliminated along with all duties

and quantitative restrictions, with the exception of those on a limited number of agricultural

products traded with Canada. Those restriction were later eliminated in 2008. Canada is an
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original member of the World Trade Organization (WTO) since January 1, 1995. In 1987,

Canada and U.S. agreed to the Canada-United States Free Trade Agreement (CUSFTA). The two

nations agreed to an agreement that placed Canada and the United States at the top of trade

liberalization. The agreement included the elimination of tariffs, the reduction of many non-tariff

barriers, also it was one of the first trade agreements to address trade in services. It also included

a dispute settlement of mechanism for the fair resolution of trade disputes.

Outside Canada’s various trade agreements, Canada adopts the Harmonized System (HS)

of the Tariff Schedules. All commercial imports are subject to customs duty and the goods and

services tax with certain exceptions. Depending on the goods or their value, some other taxes

may apply for example excise tax on luxury items like jewelry and alcohol. Canada also has the

right to impose anti-dumping duties on imports that are considered to be priced less than the

normal price charged in the exporter's domestic market. if a country is found to be unfairly

subsidizing its exporters, Canada is authorized to impose a countervailing duty equal to the

amount of the subsidy expressed as a percentage of the export price of the goods.

Looking at Canada’s licensing requirements, there are not too many. Import licenses are

only required for a limited number of goods. Imports are generally subject to import duties.

According to [ CITATION HKT17 \l 1033 ] import licenses are required for items regulated under

the Export and Import Permits Act. The Act lists various agricultural products (poultry, eggs, and

dairy products), a number of textile and clothing items, and certain steel products. While Export

Controls List contains agricultural products, refined sugar, peanut butter, textiles and clothing,

weapons and nuclear energy materials and technology, dangerous goods, etc.
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II. Exchange Rate Determination

The exchange rate is the price of one national currency, such as the Canadian dollar,

expressed in terms of another currency, for example, the U.S. dollar, or a basket of currencies.

This exchange rate between Canada and U.S. represents a floating exchange rate i.e. this rate

fluctuates daily. The Canadian Dollar (CAD) is the official currency of Canada, as of April 15,

2108 $1 Canadian dollar is equivalent to $0.78 U.S.D and $1 USD equals $1.26 CAD (Graph 1).

The United States is the largest and wealthiest economy in the world, and its currency acts as a

benchmark in international markets. There are a number of factors that in economic theory will

affect Canada’s exchange rate. Recent evidence that have shown to have an effect on the

Canadian dollar are interest rate, commodity prices, inflation rate, international trade of goods

and service, foreign investment and debt payments, and productivity.

Over the year the exchange between Canada and the U.S has been fluctuating.

Historically, the Canadian Dollar hit its all-time high of 1.61 in January of 2002 and a record low

of 0.92 in November of 2007.

III. Foreign Direct Investment Policies

The United States has been Canada's number one source for foreign investment. Canada

is the 5th biggest source of foreign direct investment for the U.S. Other major destinations for

Canadian FDI are Barbados, Luxembourg, the Cayman Islands, and other European Union

countries. Canada reviews investments under the Investment Canada Act (ICA). This is the

Canadian Federal law controlling large foreign direct investment in Canada. The ICA was one of

the first acts of Brian Mulroney's newly elected Progressive Conservative government on June

20, 1985 [ CITATION 20115 \l 1033 ]. The United States and Canada agree on important foreign

investment principles, including right of establishment and national treatment.

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Foreign direct investment in Canada improves productive capacity with the transfer of

knowledge, the development of human capital, and new technology, management techniques,

and production processes. Though FDI is important for the productivity and innovation that

Canadians need, they are falling behind. Inflows to Canada declined substantially in recent years

due to the primary sector crisis and decrease in loans between companies, primarily in the energy

and mining sector (Table 1). A report by Statistics Canada shows that FDI in Canada was USD

33.8 billion in 2017, its lowest level since 2010.

Any foreign direct investment in Canada above a certain value threshold automatically

triggers a review under the Investment Canada Act.  The review threshold varies, depending on

whether or not the investing country is a member of the World Trade Organization (WTO) and

on the specific sector in which the investment is being made. For investors that are not WTO

members, the threshold is $5 million for a direct acquisition and $50 million for an indirect

acquisition. The threshold for reviewable direct acquisitions by investors from WTO-member

countries is calculated annually according to a pre-determined formula based on growth in

Canada’s gross domestic product (GDP). 

Taxation in Canada is a privilege shared between the federal government and the various

provincial and territorial legislatures. Under the Constitution Act, 1867, taxation powers are

vested in the Parliament of Canada [ CITATION WHM06 \l 1033 ]. The Canadian income tax

brackets ranges from 15 to 33% as of 2017. The bottom Canadian bracket stays at 15% until

$45,916 CAD annual income. Then moving from 20.5% on $45,916- $91, 831, onto 26% at $91,

83- $142, 353 following to 29% on $142,353 – $202,800 and finally 33% on $202,800 and

above annual earnings (Table 2). The Corporate Tax Rate in Canada stands at 26.5%. Corporate

Tax Rate in Canada averaged 38.2 % from 1981- 2018, reaching an all-time high of 50.9% in
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1981 and a record low of 26.10 percent in 2012 (Graph 2). However, it has been relatively stable

at 26.5% from 2014 to current. When looking at Canada’s sale tax we can say the same that it

was also reminded stable for the past 10 years at 5% (Table 3

IV. Economic Structure and Performance

Most of Canada’s privatization occurred in 1985 and 1995. A variety of the privatized

operations in Canada includes natural resource related to fisheries, mining, or oil and gas,

along with other entities such as transportation (shipping, rail, air, truck) and

telecommunications. The government of Canada has used two main methods of privatization;

Direct Sale Privatization (DSP) and Share Issue Privatization (SIP). Direct Sale Privatization

involves selling a government entity to an existing private-sector entity. Most DSP take place

through privately negotiated sales and organized auctions. Share Issue Privatization is giving

shares away to the public or selling shares to the public through public markets. Most large

crown corporations have been privatized through the SIP method. The government received

about $12 billion from the privatizations [ CITATION Ant12 \l 1033 ].

The Government of Canada is making a historic investment in infrastructure, more than

tripling previous funds to build the country of the 21 st century. The budget for Canada’s

infrastructure improvement in 2016 was 14.4 billion and in 2017 is it now 81. 2 billion which

is focused on accelerating federal investments in the short term by providing funding for the

repair, and modernization of existing trade and transport infrastructure, green and social

infrastructure along with minor touches to public transit. The Government intends to invest

approximately $10.1 billion throughout the next decade in trade and transportation projects.

This investment will help build stronger, more efficient transportation passageways to
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international markets and assist in Canadian Business’ competitiveness, along with creating

more jobs. To ensure that Canada's communities are healthy and the availability of

productive living environment, investments of $5 billion are dedicated towards infrastructure

projects that protect communities and support Canada's ongoing transition to a clean growth

economy [ CITATION Inf17 \l 1033 ]. Following data collected by (World Bank, 2016) in

2016 using the current US dollar method, Canada has a calculated Gross Domestic Product

(GDP) of about $1.53 trillion, growing 1.5% from 2015 through 2016. In the same year, GDP

per capita was relatively high at $42,183. In spite of being one of the leading economies in

the world, Canada’s GDP recently shrunk from 2014 to 2016 (Graph 3). This decline is

related to factors such as weak trade, poor performance in the service sector and the

slowdown of the U.S. real GDP growth. Weak trade is tied to the drop in the goods sector

and in industries like manufacturing and wholesale trade. There was an 1.6% decline the in

manufacturing, 1.0% decline in wholesale output respectively and 0.7% decline in

transportation and warehousing. Moving to the slowdown of the U.S economy who is

Canada’s biggest trade partner. Due to the U.S. GDP slowing down, it has a direct impact on

Canada as they both rely heavily on each other for economic growth.

Canada’s inflation rate of 1.6% would be considered moderate, implying a well-

functioning labor market. Nevertheless, Canada’s follows the global trend of a decreasing

inflation rate hitting its lowest slump in 2015. Food and Housing prices continue to increase

in Canada which in terms applies a negative effect on the country’s inflation rate. The Bank

of Canada (BOC) is the Canadian central bank. The current Canadian interest rate (BOC) is

1.25%. The interest rate has been on the rise since July 2015 and is predicted to continue on
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its horizon. However, compared to the U.S and other leading economies, Canada still has

relatively average interest rate.

Throughout the year of 2017, Canadian business reported over 470,000 job vacancies.

The average offered hourly wage for job vacancies was $20.10. Minimum wages increased to

$14 CAD an hour in 2018 from its $11.40 CAD in 2017. The labor force rate in Canada

averaged 65.7% from 1976 - 2018, displaying an all-time high of 67.7% in September of

2003 and a record low of 61.4% in March of 1976 (Trading Economics, 2018). The

unemployment rate in Canada as of 2017 to current is a steady 5.8% (Graph 4).

Canada’s literacy rate for individuals 15 and older is a stable 99%, which is a clear

reflection of the free, high quality education they provide. Education in Canada is divided

into primary education, followed by secondary education and post-secondary. Education

funding is handled by federal provincial, and local governments. In general, employment rate

corresponds with the increase of education level. The employment rate for those with college

degree was 81.6% compared to those without which was 55.8%.

Unfortunately, pollution is continuous issue in the Canadian environment. It has

provoked health risks to the Canadian population which has become a serious concern for the

government. Air, water and soil pollution are the three highest types of pollution in Canada.

A recent report found that Canadian companies contributed 73% more to air pollution than

companies in the United States. Water pollution is a not a concern all over Canada, it is only

an issue over certain localities. Major causes of water pollution in the various locations

include acid rain, groundwater contamination and unclean wastewater. The main causes of

soil pollution are chemical (oil) spills into the ground, road salt, excessive pesticide used by

farmers, acid rain, and polluted water. Soil pollution can also cause numerous fatal diseases.
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Some of the most prominent are cancer, kidney disease, and liver disease. Moreover, as

mentioned before Canada has increased its budget on green infrastructure since 2016 to $29.1

billon in order to address these problems.

V. Cultural Complications

Originally, Canada's culture was influenced by European culture, mostly British and

French. Now, the way of life, family structure, customs, and dress code are closer to those of

the United States rather than those of Britain or France. When looking at Canada’s ethnic

groups, it is noticed that there are a vast variety of groups. In total, there are over 30 different

ethnic groups that live within the Canada’s borders. However, the more popular one’s are

Canadians - 32.32%, English - 18.34%, Scottish - 13.93%, French - 13.55%, and Irish -

13.43% (WorldAtlas, 2016).

The flag of Canada is a national flag consisting of a red field with a white square at its

center along with a red, 11-pointed maple leaf in the center (Figure 1). When looking at food

Canada is well known throughout the world for the quality of its ocean fish, Pacific salmon,

fresh-water fish, lobster, gold eye and white fish. The country is also well-known for its

fruits, grains, vegetables and berries. Even though Canada is filled with food from oceans,

lakes, agricultural lands, forests and wilderness areas, similar to many other countries in the

world, Canada is rapidly becoming a fast food nation. Moving to Canada music, the

indigenous people (Irish, British, French) made unique contributions to the musical heritage

of Canada.
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VI. Social and Political Stability

Canada’s political system follows a parliamentary democracy, with its own social and

political institutions. The Parliamentary democracy is a democratic form of the government

in where the party with the greatest representation in the parliament (legislature) forms the

government, its leader becoming prime minister or chancellor. Canadian political culture is a

combination of various degrees from sources including the British common law and French

civil law traditions, North American government, and English civic traditions. With this

combination in full effect, Canada’s is considered one of the most stable social and political

economies in the world. Throughout the 20-year span of 1996 to 2016 Canada shows a

political stability of 1.08 with its minimum rate in 2015 of 0.83 and its maximum in 2015 of

1.27 (World Bank, 2016) (Graph 5). Following these results, Canada has considerably

moderate political stability. When it comes to be socially stable, Canada is in good standing.

As they comply with acknowledged standards of Social Responsibility, aim at promoting a

good employer/ personnel relationship, management members are expected to be role models

in all aspects of their lives, and the government collaboratively within the society and

continue to make improvements to the community.

VII. Conclusions and Recommendations

Canada is outstanding in its qualified workforce, it has a welcoming business

environment and unparalleled access to its market. It is one of the wealthiest economies in

the world, with a market of 30 million consumers and well-developed infrastructures, as well

as a very modern transportation network. According to both Forbes and Bloomberg, Canada

has one of the best international market in which to do business. Through participation in
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regional trade agreements such as NAFTA, Canada is poised to achieve unparalleled market

access. Canada's weak points are its excessive dependence on the United States and a

financial system that is struggling to recover from the global financial crisis.

Canada’s rich natural resources, geographic position, skilled work force and stable

political climate makes this nation an idealistic trading partner. Therefore, Canada should

work to improve the North American Free Trade Agreement by renegotiating on behave auto

manufactures jobs (main loser from NAFTA in Canada), and pursue bilateral trade deals in

Asia, particularly with Japan, China and India in order to be less dependent on the U.S. Also,

Canada’s housing investment and household debt are very high, posing financial stability

risks, which can be addressed by tighten up macro-prudential measures and target them

regionally by including the increasing of capital requirements in regions with high house

price-to-income ratios.
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Appendix

Table 1

Foreign Direct Investment 2014 2015 2016

FDI Inward Flow (million USD) 59,063 41,512 33,721

FDI Stock (million USD) 958,142 760,669 956,065

Number of Greenfield Investments*** 448 315 306

FDI Inwards (in % of GFCF****) 13.6 11.3 9.6

FDI Stock (in % of GDP) 53.4 49.0 62.5

Table 2

Taxable
Federal Tax
Income
Rate
Bracket (CAD)

$0 – $45,916 15%

$45,916 –
20.5%
$91,831

$91,831 –
26%
$142,353

$142,353 –
29%
$202,800

Above $202,800 33%*

Table 3 Canada Tax Rates

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Canada Taxes Last Previous Highest Lowest

Corporate Tax Rate 26.5% 26.5% 50.9% 26.1%

Personal Income Tax Rate 33% 33.% 33% 29%

Sales Tax Rate 5% 5.% 7% 5%

Social Security Rate 13.8% 13.8% 14.9% 7.9%

Social Security Rate for 7.2% 7.2% 7.9% 4.3%

Companies

Social Security Rate for 6.6% 6.6% 7.1% 3.6%

Employees

Graph 1 Canada Exchange rate with U.S.

Graph 2
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Graph 3 Canada’s GDP

Graph 4 Canada Unemployment rate

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Graph 5 Canada Political Stability

Figure 1 Canada National Flag

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Figure 2 Map of Canada

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