Initial thoughts on how the American election results may affect the economy and business community in British Columbia.
A bit more than two weeks have elapsed since the American election, and we now know enough about the results to offer a few initial thoughts on the implications for the B.C. economy and the local business community.
It appears that former Vice President Joe Biden will be sworn in as the 46th President on January 20, heralding the arrival of a new administration along with significant changes in several important areas of US government policy. What is still not clear is the final make-up of the United States Senate – and whether the Republican Party will retain its existing slim majority among the 100 members of that august chamber. The answer won’t be known until the ballots are counted for a special Senate election in the state of Georgia on January 5. That contest will produce two Senators for the state. Most political pundits believe the Republicans will continue to enjoy a small margin in the Senate once the votes from Georgia are tallied.
Below, we comment on how the arrival of the Biden administration and a still divided Congress may shape American government policy in a few domains that matter to B.C.
We believe a Biden Presidency will be positive for overall U.S. economic growth in 2021-22, for two reasons.
First, President-elect Biden has signaled that he will put a much higher priority on containing the coronavirus than President Trump has done. This suggests the U.S. will be more successful in slowing transmission and navigating through the economic and social disruptions associated with the pandemic once new political leadership is in place. There can be no return to normal economic conditions unless and until the virus itself is under control; amid a raging pandemic, the notion that there is a significant tradeoff between public health and the economy is mistaken, as recent research confirms.
Second, the Biden administration is likely to press harder for Congress to pass a major new stimulus bill, which would also be positive for U.S. economic growth in 2021-22. Whether the new President can persuade enough Republican Senators to get behind such legislation remains to be seen. Meanwhile, an interim stimulus bill may well be adopted prior to the swearing in of the new President and Congress in January.
Stronger American economic growth in 2021-22 would generate spillover benefits for B.C., which sends more than half of our merchandise exports ($20-21 billion/year) to the United States and relies heavily on the U.S. as a buyer of B.C. service exports and as a source of international tourists. Greater success in managing the virus also promises a speedier reopening of the Canada-U.S. border than would be the case if President Trump had won a second term.
We see no dramatic shifts in U.S. trade policy vis-à-vis Canada under a new President. The Democratic Party ran on a platform that was frankly and openly protectionist, proposing a stepped-up commitment to “Buy America” policies and pledging continued efforts to challenge China and other trading partners deemed to be acting “unfairly” from the perspective of American companies and workers.
That said, the next U.S. administration is expected to be less capricious in its trade policy decision-making and less inclined to impose restrictions on imports from Canada on (dubious) national security grounds. Moreover, the U.S. is likely to take a constructive approach to reforming the World Trade Organization (WTO) instead of seeking to undermine it, as President Trump has consistently done. Both of these anticipated changes in U.S. trade policy are positive for Canada.
Finally, there is a chance the Biden administration will seek to have the U.S. join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) agreement that Canada, Japan and nine other Pacific Rim nations concluded a few years ago. Arguably, this would not really benefit Canada, since the preferential access Canadian firms currently enjoy to the markets of other CPTPP signatories compared to firms in the United States would disappear if the U.S. became a party to the agreement.
The sweeping tax reform package adopted by Congress in late 2017 and implemented the following year ushered in dramatic changes to U.S. business taxes and much lower statutory corporate income tax (CIT) rates – with the basic federal CIT rate falling from 35% to 21%, and the introduction of very generous depreciation rules for new investment.
At that point, Canada – including B.C. – lost most of the business tax advantages we had long enjoyed relative to the United States. The U.S. tax reforms also lowered personal tax rates – including for the highest earners. Overall, the 2017 U.S. tax changes rendered both B.C. and Canada as a whole less competitive for new investment and talent within the North American context.
The 2020 election platform unveiled by the Democrats proposes to hike the corporate income tax rate back to 28% (from 21% currently), and to reverse many of the personal income tax measures included in the 2017 tax reforms. If President Biden advances these ideas and is able to get them through Congress, B.C. (and Canada generally) will see an improvement in relative tax competitiveness as American corporate tax rates climb and the top fifth of American earners end up shouldering a higher tax burden.
Even so, personal income tax rates in the U.S. will continue to be well below the levels prevailing in B.C., especially for entrepreneurs and the most highly-skilled workers.
Under the Biden tax plan, the top combined federal-state personal tax rate in Washington state – which doesn’t levy a state income tax – would be higher than today but still under 40%, whereas the top combined federal-provincial rate in B.C. sits at almost 54% and kicks in at a much lower income threshold than the top rate in Washington state (or indeed any other American state).
Energy and climate policy
As with taxation, the Biden campaign promised to undo many of the environmental and energy policy changes implemented by the Trump administration, including by having the United States rejoin the 2015 Paris climate accord, moving aggressively to expand renewable power and to phase out the use of coal in the US electricity sector, and instituting more stringent vehicle fuel efficiency standards.
Most of the decline in U.S. greenhouse gas emissions in the last decade or so has come from fuel-switching in the electricity sector, with coal fired plants shutting down and gas-fired plants and renewable energy filling the gap. The U.S. continues to rely on coal for more than one-fifth of its electricity, a much higher share than in Canada (7%). Looking ahead, the U.S. has more low-cost options to further reduce emissions than Canada, thanks to the larger role of coal in the country’s electricity sector.
President-elect Biden has also committed to up to US$2 trillion in “green” investments during his mandate. In addition, his platform highlights phasing out subsidies for fossil fuels, imposing much tougher environmental rules on shale oil and gas development, and ending oil and gas exploration and production on federal government lands, among other things.
Much of this agenda can be executed using the authority vested in the President, meaning that approval of Congress wouldn’t be necessary. Of note, the Democrats have not unveiled any plan to legislate an explicit national carbon pricing system similar to those found in Canada and many European countries.
Overall, the environmental and energy policies pursued by the next US administration are likely to have mixed effects on B.C. and Canada generally.
Shipping Western Canadian oil to the US market and fetching a higher price for Canadian oil will be harder if the U.S. government kills the Keystone Pipeline, as President-elect Biden has said he will do. And over the course of a Biden presidency, the U.S. may implement some type of “border carbon adjustment” (BCA) policy that would penalize imports from jurisdictions deemed – presumably by American officials – to lack robust climate policies. There is growing support for a BCA system across the American political spectrum.
Under that scenario, Canada could be under additional pressure to deliver on its existing climate commitments and – over time – to scale up its ambitions for reducing greenhouse gas emissions beyond 2030. That could be quite problematic, inasmuch as current data and trends indicate that Canada is likely to fall short of meeting the targets it committed to under the 2015 Paris agreement.
On the other hand, a more aggressive US approach to climate policy could also produce some economic dividends for Canada. For one thing, it would help to level the carbon playing field between the two countries, as the economic disadvantages imposed on Canadian manufacturing and natural resource-based industries stemming from Canadian climate policy are tempered if not eliminated in a North American context.
Second, if the Biden administration takes firm action to discourage the domestic production of shale oil and gas, that could make Western Canada more attractive for companies looking to invest in the sector, while also potentially boosting US demand for Canadian oil. Finally, a stronger push for carbon-free electricity in the United States may open up new export opportunities for Canadian renewable power producers.
For Canada, one thing is clear: there is about to be an important shift in the direction and content of U.S. government climate policy. Canadian policy-makers should be looking to collaborate with the new U.S. administration to develop joint approaches for managing the transition to a lower-carbon future.
During the Trump era, the United States has become less open to and welcoming of new immigrants. This has reinforced the advantages of Canada’s more liberal immigration regime, which has seen a rising intake of newcomers who qualify as “skilled” workers, as well as record numbers of international students attending Canadian education institutions.
While no major immigration legislation was passed in the United States over the 2017-2020 period, President Trump used his expansive executive authority to make many changes to the rules governing the entry of both high- and low-skilled foreign workers, international students, asylum seekers, refugees, and other groups. As a result, U.S. immigration numbers have declined since 2016, and some American technology companies have been investing in Canada and other countries in part to gain access to well-educated immigrants who are able to work in these jurisdictions.
It is almost certain that the Biden administration will reverse most if not all of the immigration-related Executive Orders issued by President Trump. And it is conceivable – though far from certain – that a sufficient bipartisan consensus could emerge in Washington D.C. to allow for a broader overhaul of the legislative framework governing immigration, including by moving closer to the “points-based” systems used in Canada and Australia.
In any case, we expect that the imminent departure of President Trump signals that the United States will again become a more appealing and accessible option in the eyes of talented foreigners looking to emigrate for reasons of work, opportunity, education or quality of life.
Jock Finlayson is executive vice-president of the Business Council of British Columbia.
- Last month, Jock Finlayson and Denise Mullen identified the key missing ingredient in discussions about transitioning to renewable energy.
- Joe Biden figured prominently in Michael Taube’s forecast of how politics would change in 2020. Of course, the biggest change (that whole global pandemic thing) was still about two and a half months over the horizon.
- Ada Slivinski: Efforts and attention are rightly focused on COVID-19 – but we shouldn’t blind ourselves to the side effects of lockdown and isolation. There’s an “echo pandemic” in mental health.