Canada faces a critical juncture in its approach to artificial intelligence. With national productivity largely stagnant for the past ten years, the potential economic gains from AI are too significant to risk with premature, heavy-handed regulation. The recent path taken by the European Union serves as a stark warning of what Canada must avoid.
Europe's "Regulate First, Innovate Later" Misstep
In 2025, European lawmakers, driven by concerns over emerging AI technology, enacted a sweeping regulatory framework. This move has been widely criticized as an act of economic self-sabotage, cementing a "regulate first, innovate later" philosophy. Rather than allowing technological innovations to unfold and then crafting tailored responses, the European Commission chose to pre-emptively regulate a technology whose full implications are still unknown.
The core of the EU's AI Act imposes obligations on companies based on their products' presumed risk levels. However, assessing risks to fundamental rights in advance is exceptionally difficult. Calculating potential costs before any clear damage occurs is a complex process that most firms are ill-equipped to handle, if it is even possible at this early stage.
The Chilling Effect on Competition and Investment
The financial penalties under the EU regime are severe. Companies deemed "high-risk" face fines of up to €15 million or 3% of their global revenue, whichever is higher. While such regulations are often framed as checks on large tech giants, their practical effect is the opposite. Behemoths like OpenAI, Google, and Meta possess the resources to absorb compliance costs, whereas startups and smaller competitors are disproportionately burdened.
This dynamic stifles competition, and the ultimate loser is the consumer. Reduced competition leads to fewer choices, higher prices, and less innovation. The EU's approach mirrors the impact of its General Data Protection Regulation (GDPR), which studies show ultimately strengthened large digital platforms and reduced sectoral innovation in Europe compared to the United States.
The data is telling. In 2024, private investment in AI in the United States soared to over US$29 billion, dwarfing the US$1.5 billion invested in Europe. Furthermore, 1,143 AI companies were founded in the U.S., nearly triple the 447 created in Europe. Since the regulatory talk intensified, the number of AI applications available in the EU has fallen by a third, and the rate of new entries has plummeted by 47.2%.
The High Stakes for Canadian Productivity and Prosperity
For Canada, the stakes are immense. AI is not just a sectoral issue; its gains are projected to ripple across the entire economy. Some research indicates AI could boost the productivity of unskilled workers by as much as 14%. Given the direct correlation between productivity, profit generation, and wage growth, harnessing this potential is key to improving standards of living.
Adopting a similarly restrictive regulatory model would likely see history repeat itself in Canada: investment would flee, startup formation would slow, and our technological lag would grow. At this nascent stage of the AI revolution, it is challenging to predict all its future applications, let alone the specific damages that might arise. Policymakers should observe and understand the technology's evolution before codifying penalties for harms that have not yet materialized.
The lesson for Canada is clear. To unlock the transformative economic benefits of AI and break free from a decade of productivity stagnation, we must resist the urge to over-regulate out of precaution. A balanced, evidence-based approach that fosters innovation while being ready to address real-world harms is the path forward, not one of pre-emptive restriction.
