Reducing Canada’s Trade Dependency on the US

Introduction

Canada and the US have enjoyed a good trade relationship with each other for decades. This had resulted in favorable economic outcomes for both countries. Due to the close geographical proximity of the two countries and the amiable relationship between the respective governments, Canada’s trade with the US has witnessed significant growth over the last three decades. Moens documents that from the year 1980 to 2004, the volume of trade between US and Canada more than tripled from $194.2 billion to $680 billion.¹ However, this large volume of trade has created a situation where Canada is economic over reliant on the US. Reports indicate that in 2006, nearly 50% of Canada’s GDP was from the US trade relationship. The Canadian government should do more to reduce Canada’s trade dependency on the US and consequently increase its gains from globalization while reducing the risks attributed to dependency on a single trading partner.

Why Trade Dependency should be Reduced

A major reason why Canada should take steps to reduce its trade dependency on the US is that this situation effectively makes Canada’s economic wellbeing dependent on the prosperity of the US economy. The earnest increase in trade between the US and Canada began after the signing of the North American Free Trade Agreement (NAFTA). With the signing of this free trade agreement, Canada hoped to gain special access to the US economy.² The Canadian government was convinced that increased trade activities with the prosperous United States would benefit Canada economically. The US created a huge market for Canadian exporters therefore boosting the economy.

However, this economic dependency introduced significant risk to Canada since its economy was now tied to the prosperity of the US. The negative aspect of this relationship was highlighted during the 2008 financial and economic crises in the US. Moens illustrates that the financial crises depressed US trade and dragged the trade-dependent Canadian economy down with it.³ This situation highlighted the dangers of depending too much on one country for trade. Canadian Government officials should increase their trade relations with other countries to prevent the prosperity of Canada from being directly dependent on the prosperity of the US.

The high dependency on the US has made Canada vulnerable to US protectionist measures. Traditionally, US-Canadian trade relations have benefited from the free trade agreements made by the two countries. The US and Canada are signatories of NAFTA, which is an agreement that was effected in January 1, 1994 to eliminate barriers to trade between the US, Canada and Mexico. Since its implementation, NAFTA has eliminated most non-tariff trade barriers between the US and Canada and increase the level of investment between the two countries. However, the provisions of NAFTA have been undermined by increasing protectionist practices by the US. Haussman and Macdonald state that since Obama took office in January 209, the US has become increasingly protectionist.⁴ The US Congress has made plans to include “Buy American” provisions in the economic stimulus packages provided by the government to rejuvenate the economy. Such plans block Canada from lucrative deals in the US worth billions of dollars leading to economic loses by Canada. Diversifying Canada’s trade will ensure that Canada has other trade partners that can offset the negative effects of the United State’s protectionist measures.

A reduction in trade dependency on the US would ensure that Canada is not unduly affected by national policies pursued by the US government. As it currently stands, the high level of economic dependency has made Canada susceptible to US internal policies. For example, Canada’s oil industry can be affected by environmental policies pursued by the US. The requirement for clean energy by the Obama administration has become a non-tariff barrier for oil producers in Canada.⁵ In addition to this, emission cut policies by the US have an effect on Canada since it imports a lot of goods to the US.

As of May 2009, the US was set to pass a broader set of emission cap and trade permits. These permits would have an effect on Canada’s oil industry and key manufacturing industries such as steel and cars. Moens reveals that the emphasis on green energy by the Obama administration is worrisome for Canada’s largest export sectors.⁶ The ability of the Canadian government to determine its own economic destiny is therefore diminished if the country can be significantly affected by the national policies of its trading partner. Reducing trade dependency on the US will mean that international policies by the US administration will not have a huge impact on Canada’s economy.

Canadian sovereignty is to some extent undermined by the trade dependency on the US. Canada and the US share the largest bilateral trade relationship in the world and both countries are each others’ largest trading partners. However, this relationship is not one of equals since the US does not rely on Canada for a significant percentage of its trading. As has been noted, about half of Canada’s GDP is dependent on the trade relations with the US. Kent observes that Canada is significantly more dependent on the US than the US is on Canada.⁷ This situation provides the US government with great political leverage over Canada.

Following the devastating terror attacks on the US in September 11, 2001, the US administration has engaged in some unilateral policies concerning the US-Canada border. In most cases, Canada has been forced to cooperate with these unilateral decisions since an amicable relationship with the US serves Canada’s own national economic interests. Canada has surrendered sovereignty through partnership programs such as Smart Border Agreements and Security Prosperity Partnership.⁸ The Canadian authority argues that its citizens benefit from the sustainment of its prosperous and amiable relationship with the US though these concessions of traditional state sovereignty. However, this concession of sovereignty hurts Canada’s international standing. The international community has a reduced view of Canada’s capacity to act as an independent unity in the global system.

The dependency on the US has curtailed attempts to diversify Canadian trade away from the US market. Due to the emphasis on trade with the US, most Canadian exporters engaged in actions aimed at product standard compatibility and regulatory harmonization with the US.⁹ While these steps greatly benefited Canada in the past, their importance today is diminished. By aggressively pursing regional trading arrangement with the US, Canada ignores other opportunities on the global trade arena. Diversification of Canada’s economy would not be a great concern if the trade relationship with the US was productive. However, no major advancement has been made in the bilateral relationship between US and Canada over the past 8 years.

This suggests that the economic benefits of focusing on the US might not be sustainable. As such, Canada’s future prosperity might be dependant on increasing its trade activities with other partners. Trade diversification policies have been proposed by the government to increase trade with the EU.¹⁰ In addition to this, Canada has acknowledged that BRIC countries (Brazil, Russia, India, and China) represent a major market for Canadian products. Increasing trade with the EU and BRIC countries is critical to Canada’s long-term prosperity. On the short term, Canada’s increased trade with other countries, and especially the BRIC countries, will make up for any decline of trade with the US. On the long term, it will guarantee Canada’s sustainable development even without the US.

Discussion and Conclusion

As it currently stands, the Canadian government is strongly convinced that greater economic integrations with the US though bilateral initiatives are the best for Canadian interests. Economic commentators document that Canada’s top economic interest still remains gaining unimpeded access to the US market. However, the country has been forced to acknowledge the negative impacts of dependency on the US. McDonough documents that Many Canadians call for trade diversification to secure Canada’s long-term economic interests.¹¹ In response to this, there has been some degree of diversification from the US economy by the Canadian government. However, the pace of this diversification would have to be increased significantly to assure Canada’s economic independence in the near future.

This paper set out to argue that the Canadian government should increase measures to reduce Canada’s trade dependency on the US. The paper has shown how Canada has exposed itself to significant risks due to overreliance on trade with the US. In addition to this, there are many economic opportunities on the global platform that Canada fails to exploit due to the relationship with the US. Radical steps need to be taken to decrease the high dependency of Canada’s economy on the US. The Canadian government should pursue aggressive trade diversification policies that will ensure that the country’s trade dependency on the US is reduced to minimal levels.

Works Cited

Haussman, Melissa and Laura Macdonald. “Introduction: Canada-US Relations under Obama: Continuity or Change? ACSUS Enders Symposium, Carleton University, 2008.” American Review of Canadian Studies 39.4 (2009): 323-335. Web.

Kent, Jonathan. “Border Bargains and the ‘New’ Sovereignty: Canada-US Border Policies from 2001 to 2005 in Perspective.” Geopolitics 16.4(2011): 793-818. Web.

McDonough, David. Canada’s National Security in the Post-9/11 World: Strategy, Interests, and Threats. University of Toronto Press, 2012. Print.

Moens, Alexander. “Lessons Learned” from the Security and Prosperity Partnership for Canadian–American Relations.” American Review of Canadian Studies 41.1 (2011): 53–64. Web.

Footnotes

1. Alexander Moens, “’Lessons Learned’ from the Security and Prosperity Partnership for Canadian–American Relations,” American Review of Canadian Studies 41.1 (2011): 56.
2. Melissa Haussman and Laura Macdonald, “Introduction: Canada-US Relations under Obama: Continuity or Change? ACSUS Enders Symposium, Carleton University, 24 October 2008”, American Review of Canadian Studies 39.4(2009): 332.
3. Moens 60.
4. Haussman and Macdonald 331.
5. Haussman and Macdonald 331.
6. Moens 60.
7. Jonathan Kent, “Border Bargains and the ‘New’ Sovereignty: Canada-US Border Policies from 2001 to 2005 in Perspective”, Geopolitics 16.4(2011): 800.
8. Kent 802.
9. Moens 54.
10. David McDonough, “Canada’s National Security in the Post-9/11 World: Strategy, Interests, and Threats” (Toronto: University of Toronto Press, 2012) 143.
11. McDonough 143.