“Overseas trade growth would largely be driven by energy and commodities shipped via port, and higher-value manufactured goods shipped by air,” the Scotiabank report says. (Photo by Liang Sen/Xinhua via Getty Images) · Xinhua News Agency via Getty Images
Developing the infrastructure necessary to make Canada’s economy less dependent on trade with the U.S. “will not be easy, fast, or cheap,” and will require refocusing investment priorities, a new report from Scotiabank Economics says.
The report by senior policy advisor John McNally points out that government infrastructure programs launched long before the current trade tensions with the U.S. began to unfold have “not been able to keep up with existing demand, let alone support growth.” They also focus largely on road and rail infrastructure, while increasing exports to other countries would necessarily require a focus on marine and air.
“Tackling this issue would require private and public sector pushes to invest additional capital, advance deregulatory efforts, and overcome the inefficiencies causing national headaches,” the report said.
Tariffs and the upheaval of global trade relationships have been among the defining narratives of U.S. President Donald Trump’s second term, with the need for trade diversification becoming a central talking point in response. Prime Minister Mark Carney recently signed on to a security and defence partnership with the European Union, while Bank of Canada governor Tiff Macklem told an audience in Newfoundland that “diversification adds resilience.”
The Scotiabank analysis modelled the impact of shifting away exports to the U.S. and found that redirecting 10 per cent of trade away from the U.S. would increase the share of goods leaving Canada via ports by five per cent and via airports by three per cent. Due to the realities of geography, air and sea transport accounts for less than 10 per cent of Canadian exports to the U.S., but virtually all exports elsewhere.
“Overseas trade growth would largely be driven by energy and commodities shipped via port, and higher-value manufactured goods shipped by air,” the report said.
Yet the second-order effects of the trade shock—namely uncertainty brought about by trade tensions—are further dulling investment, worsening an underlying problem.Scotiabank Economics
However, current government estimates for long-term capital expenditures “forecast road and rail to account for over 80 per cent” of infrastructure spending, the report points out. Given this, McNally writes that “a rebalanced portfolio is needed,” as well as additional spending. Canada would need to invest in marine and air infrastructure in addition to “strengthening east-west investments in rail, road and intermodal capacity.”
The report says Canada’s airports may be reasonably well equipped for an increase in cargo shipments, but the same is not true for the country’s major ports. Two of Canada’s three largest ports were ranked in the bottom 15 per cent in the world for container port performance by the World Bank in 2023, Scotiabank observes. Rail infrastructure investment, furthermore, would need to be around 2.5x current annual expenditure to meet requirements forecast by a federal government task force.
Story Continues
The report notes that the impact of the trade war thus far has been far better than modelled in worst-case scenarios, and the direct economic impact could be muted. “Yet, the second-order effects of the trade shock—namely uncertainty brought about by trade tensions—are further dulling investment, worsening an underlying problem,” the report added. “Here, diversification can help.”
However, Scotiabank cautions that a significant overhaul of infrastructure priorities will not have immediate effects, nor will it solve all of Canada’s economic problems — again because of the realities of geography.
“Selling into different markets would require investments and relationships that typically take years to bear fruit, likely offering little to offset volatility in the coming months,” the report said.
“Expectations should also be clear around degrees of diversification sought. Given the geographic proximity of U.S. markets, Canadian trade flows will likely remain integrated with our southern neighbour, with diversification offering a hedge (or marginal benefits) to reduce overall risk.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
Download the Yahoo Finance app, available for Apple and Android.