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As a response to the new American Administration’s tariffs and 51^st state comments, Canadians have responded with a wave of nationalism that is being captured in the “Elbows Up” movement. 

Shifting Spending Habits

One interesting aspect of this movement is how quickly Canadians have shifted their spending habits.  The “Buy Canadian” sentiment is quite prevalent now in our grocery stores.  During the early stages of the tariff announcements, it was not uncommon to see consumers in grocery aisles, scouring the fine print on labels, and trying to discern a country of origin.  It did not take long for grocery stores to respond to this new market demand, and now many grocers are actively promoting Canadian made products, and in some cases grocers are even priming shoppers on which items will be impacted by tariffs.

In a recent article from the Globe & Mail, economist Pierre Cléroux opined that if every Canadian household redirected $25 a week from foreign products to Canadian ones, it would boost GDP by 0.7% and create 60,000 jobs.  He went on to say that if Canadians cut international travel by 10% and spent that money domestically, the combined effect would raise GDP by 1% and create 74,000 jobs.

This leads me to ask the question: are Canadians ready for a move away from the laissez-faire/free trade consensus?  Are we ready to sacrifice economic efficiency, just-in-time supply chains, and the comparative advantage of trade so that we can emphasize national security and self-reliance.  If so, what exactly are the costs, and who pays?

Coming back to the analysis performed by Mr. Cléroux, I can understand that a shift in consumption can generate a meaningful impact on our GDP – but the real question is whether it would increase our standard of living.  Just because we have the ability to grow banana’s – doesn’t mean that we should… or should we?

A New World Order

Many Canadians are having a difficult time understanding why the new American Administration is targeting us for this trade war – this author included. 

However, this article from TD Global Investment Solutions does as good a job as any at explaining what is going on.  In brief, the new American Administration wants to curb foreign reliance, especially on China, and restore US manufacturing strength.  To achieve this, they will continue with the ongoing shift toward reshoring and focus on industrial policy in sectors that are deemed strategically critical (e.g. semiconductors, batteries, energy, and medical supplies).  The article outlines that domestic manufacturing is crucial for supply chain security and national defense; and that public sentiment in the U.S. has also turned against free trade, especially with China, due to security concerns and perceived economic losses. 

What is unclear is just how well the tariffs will work, and how hard it will be to rebalance global trade.  With respect to the tariffs, they may help some workers by encouraging local production, but they also act as a tax and potentially do more harm than good for low-income consumers.  With respect to the rebalancing of global trade, this will be a lot harder to solve, as it will require China to shift away from export-reliant growth and consume more of what they produce domestically.

The implications may be that we are entering a new economic era – one dominated by industrial policy and high tariffs.  If this is the case, Canadians may have no choice but adapt to a post laissez-faire/free trade world.

Implications for Pension Plans

I recently listened to a C.D. Howe Institute podcast where Claude Lamoureux, former president of the Ontario Teachers’ Pension Plan, was interviewed on the implications of the trade war on Canadian pension plans.  He was asked about his opinion of using Canadian pension funds as a policy tool – namely, to invest more in Canadian assets.  Mr. Lamoureux was not keen on this idea.  He noted that pension managers are fiduciaries and need to invest for the long term and in the best interests of their clients.  Mr. Lamoureux stressed that while governments can help to create investment opportunities in their economies, they should not rely on their pension plans as an industrial policy tool.

This is sound advice.  Particularly if you think, like Mr. Lamoureux does, that the new American Administration’s agenda will be hampered in achieving its goals by limitations in the American labour market (e.g. current low rates of unemployment, aging demographics, and reliance on foreign workers), and with a potential change in Congress in 2026.

But what if we no longer live in a laissez-faire/free trade world?  What if we are truly moving into a new economic era dominated by national self-reliance?  And what if Congress does not change, or this trend continues after 2026?

I don’t have any easy answers on what we should do.  But if this trend persists, then, although controversial, I think we need to more thoroughly consider the case for having dual mandates for pension plans and reintroduce the foreign content limit applicable to registered pension plans.

Dual Mandates and Foreign Content Rules

Dual Mandates for pension funds are where the fund is expected to not only maximize the investment returns but also contribute to the economic development of the host country.  Mark Wiseman, former president of the Canada Pension Plan Investment Board, recently articulated that dual mandates are a wolf in sheep’s clothing – with critical concerns of political interference and insufficient diversification.  Clearly, there is a slippery slope here where too much political interference in the management of a pension fund can lead to poor outcomes. 

I am very sympathetic to Mr. Wiseman’s critique of Dual Mandates.  However, pension plans benefit from tax-deductible contributions and tax-deferred growth, and so I believe there is a role for governments to implement reasonable restrictions on how they are invested.

Foreign investment limits have applied to Canadian pension plans in the past, and mandated that a specified percentage of assets be invested in Canada.  In 2005, the foreign content limit of 30% was removed (but it is worth noting that some plans could work around these limits prior to 2005 with complex financial derivatives). 

If we are moving towards a post laissez-faire/free trade world, then at the very least governments and economists should more fully consider the costs and benefits of re-introducing the foreign content rules for pension plans (and maybe even re-consider if some form of Dual Mandate should be implemented). 

I am not an investment guru, nor am I an economist, so I do not have the answers.  However, the questions I am asking myself these days are:

• If Canadians are shifting their preferences to “Buy Canadian” at the grocery store, will they also shift their preference to “Invest Canadian” in their pension funds?  Would Canadian pensioners be willing to forgo larger pensions (e.g. inflation protection) in exchange for greater investment in the Canadian economy?
• What are the pros and cons, and winners and losers of re-introducing the foreign content rules (or having Dual Mandates)?  Will this increase GDP and increase jobs by providing Canadian businesses and their workers with access to more capital?  Or will this have very little impact on growing the Canadian economy, and instead allow inefficient and uncompetitive Canadian companies to persist; while producing lower diversification and risk-adjusted investment returns, and higher pension costs?

I would love to see economists tackle these questions.  And similar to my comments on the analysis performed by Mr. Cléroux discussed earlier, understanding the impact on GDP is one thing, but we also need to understand if a change would have a meaningful impact on our standard of living.

Frankly, I would prefer to continue to live in a laissez-fair/free trade world where applying something akin to the Friedman doctrine to pension fund management is the norm – but times change, and maybe we need to change too.  Or maybe, as Mr. Lamoureux alludes to, we just need to live through this, as he expects it to be short lived.