Tuesday, June 3, 2008

The US-Canada Economic Relationship - An American Perspective

This summarizes a talk by Earl Fry, Professor of Political Science at Brigham Young University as part of the Canadian Leadership Orientation for North American MBA Students sponsored by ACSUS, HEC Montreal and the University of Ottawa Telfer School of Management.

The Canada-US Economic Relationship – An American Perspective

Earl Fry, a professor focused on the US-Canadian relationship at Brigham Young University gave an interesting talk on the integrated nature of the US and Canadian economies focused on the trade relationship. Obviously, the economic integration between the US and Canada is massive. There are 200 million 2-way border crossing per year. Over 21% of total US exports went to Canada in 2007 (12% to Mexico). 16% of total US imports came from Canada. This is the largest bilateral trading relationship in the world, though China passed Canada recently as the largest supplier. The US-Canada trade totals $1.5 billion in daily 2-way trade. In 2005, US foreign direct investment was $235 billion, providing 1.1 million jobs. Canadian FDI in the US was $144 billion that same year, so the relationship clearly runs both ways. Affiliates of US companies accounted for 10% Canada’s GDP.

Current State

Fry sees much of Canada as doing extremely well currently despite the current downturn caused by the roiling of the US financial markets. Newfoundland, Alberta and Sasketchewan are all doing very well. Currently, Ontario and Quebec, manufacturing bases aren’t doing as well – this is due in great part to the rising Canadian currency, which is hurting the manufacturing bases there. Overall though, the economy has done well. It is the only G7 economy that has been running a surplus. However, Fry sees much of this as commodity related, and like Peter Hall mentioned yesterday in talk, could be cyclical.

Border

Clearly one major issue throughout the week so far has been the thickening of the US/Canadian border, where so much of this vital trade runs through. Fry feels that it has been thickened too much. Technology and process are essential to solving this problem. He pointed to the demoing of a ID card being tested at the Canada/British Columbia border, and off-site pre-transport checks as an examples.

Fry thinks that one possibility is a North American border alliance where once you enter Canada or the US you can move freely between the two borders. If the Europe can pull it off, why couldn’t North America? This doesn’t seem likely in the near future however, given the siege mentality the US has after 9/11. The American leadership will likely continue to feel that they must keep national security in their own hands.

Tourism

Canada’s #1 source of foreign tourists is the US. This is a major problem this year. With the weakness of the American dollar and high gas prices, many Americans are staying home. 2008 is the 400th anniversary of Quebec City, and they were an example of one city expected a lot of tourism this year that is going to be disappointed barring a sudden and unexpected turnaround in fuel prices. From what I’ve seen, Canada has embarked on an extremely ambitious tourism marketing campaign. There was a massive setup in the Back Bay of Boston last week, right down a VIA Rail train car and photo opportunities with a fully uniformed Mountie. I’m not sure if this push was planned or is an additional expenditure to prop up some local Canadian economies in what promises to be a very tough year.

Energy Security

Oil and America’s energy security is an important part of this relationship. The US imports 60% of its oil, with Canada as the top provider. Canada is also a major supplier of hydroelectric power. The US produces about 5% of the world’s oil and produces 20%. Canada ranks 6th in the world in oil production overall. Due in great part to oil, Alberta exports 86% of its provincial exports to the US. Generally, it doesn’t strike me that that most people are aware of this relationship. Many of the speakers this weekend, such as Frank McKenna, former Canadian Ambassador to the United States, and Gary Mar from the Province of Alberta say this is generally a good thing. Many US energy sources like Nigeria, Venezuela and the Middle East are far less stable and we hear much more about them. Said Fry, “They don’t worry about revolution in Canada.”

Financial Regulations

One of the challenges is integration in financial services. Canadian financial regulations are at the provincial level which makes it more difficult to work with the SEC. This is one of the challenges of federalism. Fry believes that going to one standard across the country would make it much easier. Fry says they have begun talking about that. Fry expects there will be a number of takeovers of US companies by foreign firms in the US.

Foreign Policy

The countries work together without always agreeing with the US on foreign policy. Canada didn’t support the Vietnam War, and clearly they have a different policy on Cuba, for instance. While Canada favors multilateralism, the US has acted unilaterally in a number of cases. Especially recently, this has drawn the ire of Canadians. According to Fry, a recent Pew poll said 60% of Canadians did not feel the US was a force for good in the world. Hopefully, this issue will be solved by our November election. The Canadian government has to tread lightly given the dependency of its economy on the US.

NAFTA

Fry’s view is that NAFTA has been imperfect but it has been a positive force in driving increased trade, direct investment and enhancing supply chains. It has also increased the cross-border movement of professionals, which I imagine enhances the quality of the overall labor market in all three economies. One theme throughout the conference has been North American competitiveness. The view of most of the speakers here is that NAFTA is a positive force in driving the ability of the United States, Mexico and Canada to effectively withstand competition from rapidly growing regional economies in the rest of the world.

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