The U.S. President-Elect, Mr. Donald Trump, has humorously suggested that Canada should become the 51st state of the United States. While a political union between Canada and the U.S. is highly unlikely, an economic union similar to the European Union (EU) remains a plausible, albeit hypothetical, possibility. What would be the macroeconomic implications for Canada in such a scenario?

In this imagined economic union, Canada would obviously be the smaller partner, with its population and gross domestic product (GDP) representing just 12.2% and 9.0%, respectively, of those of the United States. This disparity means the relative impact of the union would be felt much more strongly by the Canadian economy.

When considering the macroeconomic implications, it is natural to focus on the movement of people, capital, and technology.

Movement of People

While the quality of the labor force, as measured by average years of schooling or the proportion of university graduates, is comparable between the two countries, the per capita GDP (adjusted for purchasing power) is 35% higher in the U.S. than in Canada. This highlights a significant gap in labor productivity between the two nations.

If an economic union allowed for unrestricted movement of workers, highly skilled Canadians might migrate to the U.S. in search of higher wages and more opportunities. At the same time, Canada’s most productive firms would benefit from access to a larger pool of highly skilled American workers, while less productive Canadian firms might struggle to compete and potentially exit the market. This pattern has been observed in the EU, where labor migration from east to west and south to north has reshaped economies.

Movement of Capital

An economic union could trigger significant capital flows, including investments from the U.S. into Canada’s natural-resource sector. Such investments could create jobs and improve productivity for Canadian workers. Similar dynamics have been observed in resource-rich European countries after joining the EU. For instance, Poland’s accession to the EU in 2004 attracted substantial foreign direct investment (FDI) into its coal and copper industries. Likewise, Bulgaria, Romania, Spain, and Slovakia experienced significant FDI inflows into their resource sectors post-EU integration.

However, in Canada, large-scale investments in the resource sector could spark controversy, particularly around environmental concerns and impacts on local communities. Balancing economic gains with sustainability would be a critical challenge.

Technology Cooperation

The United States is a global leader in technology. A common measure of a country’s innovative capacity is the number of successful patent applications. In 2023, the U.S. granted approximately 18 times more patents than Canada, even though its population is only eight times larger.

An economic union could enhance technology cooperation, potentially boosting Canada’s innovative output. Economists generally find a strong positive correlation between innovation and productivity, suggesting that greater collaboration with the U.S. in this area could significantly improve Canada’s productivity.

Conclusion

In summary, an economic union with the U.S. could increase competition for highly skilled workers, attract substantial U.S. investments to Canada, and foster greater technology cooperation. These factors would likely lead to higher labor productivity in Canada, ultimately improving Canadians’ standard of living.

This analysis has focused on the movement of people, capital, and technology—the primary drivers of long-term economic performance. Other important aspects of an economic union, such as implications for currency, and monetary and fiscal policies, remain outside the scope of this discussion due to space constraints.

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