Can Ontario’s economy recover if the U.S. can’t get COVID-19 under control?

ANALYSIS: Ontario and Canadian policymakers are desperate to restart the economy. Given our trade ties to the United States, the recovery may be out of their hands
By John Michael McGrath - Published on Jul 21, 2020
Canada and the United States have agreed to extend the border closure until August 21. (iStock/tillsonburg)

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The COVID-19 situation in the United States is, in a word, bleak. Across a number of states, both the case count and the number of deaths have risen sharply, and now mayors and governors have to reverse tentative reopenings and abandon plans to open schools in August. Right now, absent a widely available vaccine in the near future, there’s no obvious prospect for the disease coming under control.

This is a human tragedy for Americans, with thousands of needless deaths. For Canadian and Ontario policymakers, it’s something else: a complication for anyone hoping to revive the economy to anything approaching its pre-COVID-19 levels.

“I think we have to assume there’s going to be some degree of caution, and there’s a risk of full-blown shutdowns or more surgical shutdowns,” says Robert Hogue, senior economist at RBC Economics. “We’re highly interconnected, both Ontario’s economy with the U.S., and, I would argue, globally.”

The problem isn’t that the U.S.-Canadian border is closed, now until August 21. Commercial trade shipments have been allowed through the border despite the prohibition on non-essential travel. Rather, the problem is that Canadian manufacturers and other exporters are so deeply enmeshed in supply chains that include American companies that a disruption in a U.S. state can have ripple effects that cause chaos for Canadians.

Because Canadian manufacturing in concentrated in Ontario, that leaves this province particularly exposed to U.S.-based risks.

For example: on July 15, Michigan governor Gretchen Whitmer warned the public in that state that, if the levels of COVID-19 infections can’t be brought down, the continued operation of the state’s auto plants could be jeopardized. That would throw thousands of people out of work agai and could wreak havoc on auto-parts suppliers on the Canadian side of the border: in 2019, 20 per cent of Ontario’s goods exports went to Michigan.

“If that happens, that guarantees there’s going to be a break in supply of key inputs to vehicles assembled in Canada,” says Glen Hodgson, fellow-in-residence at the C.D. Howe Institute. “And it also means that things made in Canada — all the parts made in Ontario — won’t be able to ship to their buyers in Michigan, so they’ll have to shut down as well.”.

And that’s just one of the possible complications. Hogue says that, although Ontario is seeing some rapid growth now and could see more in the coming months, it’s going to be a long journey to get the economy back to where it was in January.

“At this point, an economic recovery both for Ontario and across Canada, as well, is probably a 2022 story,” says Hogue. “Beyond that near-term rise in activity, it’s going to take longer for the healing to proceed — no pun intended.”

The problem for both federal and provincial governments is that there’s precious little they can do to solve this problem. Obviously, neither Ontario nor Canada has the ability to alter the course of a pandemic outside our borders. And disentangling Canadian companies from their U.S.-based supply chains is the work of years; even if it were possible, it could easily take longer than the development of a reliable vaccine.

Hodgson says such disentangling would require not just policy changes in government — including, potentially, changes to international trade agreements — but also a change in attitude among business leaders.

“It raises much bigger questions, like whether companies start to apply more of a risk-management lens, try to diversify their supply chains, and do more to anticipate disruption,” he says. “It really goes to business strategy: the CEOs of this industry will need to sit down and decide … there could be higher costs for consumers, but it really goes to the business model.”

“The thing we’ve been singing about for 20 years is diversify trade, but it’s easier said than done,” says Don Drummond, a professor and fellow at Queen’s University. “It doesn’t look too promising to diversify with China right now, and that was the flavour of the month until fairly recently.” And other potential alternative trading partners are reeling from COVID-19 themselves.

Which isn’t to say that there aren’t things Ontario can do — and, perhaps more important, avoid doing: Drummond argues that the Tories will need to abandon any ideas about rushing to balance the province’s budget until the economy has recovered.

“It’s going to be very difficult, because they ran on a balanced budget, and, obviously, this has whacked them away from that further than they anticipated,” Drummond says. “You don’t really want to start aggressively undoing that until you’re on a surer economic footing.”

Drummond also says that, in order to get the economy back to full strength, governments should be focusing on childcare and schools to ensure that parents can go back to work.

“It’s probably going to be the biggest economic obstacle we face,” he says. “If that doesn’t work, we’re going to have 15 to 20 per cent of the workforce not back in or not fully back in.”

For Hogue, any recovery will have to take into account the province’s fiscal and debt situation.

“The government was running a substantial deficit even as the economy was really roaring before COVID-19,” he says. “And the debt had increased quite a bit, and that will obviously need to be addressed in coming years.”

Hogue says the government should concentrate on creating a more welcoming environment for business creation so that entrepreneurs can help drive the recovery. Part of that includes attracting global talent to Ontario, something that’s not strictly about the usual low-taxes and business-formation bromides but also includes broader quality-of-life issues.

“A tech company can operate from pretty much anywhere in the world,” he says. “So, to be competitive, you need to offer something that’s really attractive … good family policies that make it easy to raise a family in Ontario. I think, from that perspective, Ontario has a lot to offer.”

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