How Would U.S.-Canada Trade Fare In An Age Of Protectionism? by Knowledge@Wharton
This month, as delegates of the Republican and Democratic parties meet to hammer out their platforms regarding foreign trade and environmental issues, a great deal of attention will be focused on U.S. ties with China and Mexico, and on U.S. policy regarding the Trans-Pacific Partnership (TPP) initialed by the U.S. and 11 other Pacific Rim nations. Safe to say, little attention will be focused on Canada, a country that is widely ignored by the U.S. media, despite being the largest single trading partner of the United States.
On June 28, presumptive Republican presidential nominee Donald Trump vowed, if elected, to force Canada and Mexico to renegotiate their historic 1994 North American Free Trade Agreement (NAFTA) with the United States, part of his proposed effort to protect and restore American jobs. Criticizing NAFTA as a U.S. “job killer,” and linking presumptive Democratic nominee Hillary Clinton to that trade pact, Trump said he would be open to scrapping the pact if Canada and Mexico were unwilling to budge. Both Trump and Clinton have voiced criticism of both NAFTA and the TPP, which have won strong support from President Obama.
What kind of impact would such policy changes have on ties between the U.S. and Canada? It’s not hard to understand why so many Canadians are deeply concerned about Canada-U.S. trade relations while most Americans — including many smaller corporations — barely give the U.S. relationship with Canada a second thought. Canada’s population of 36.2 million (versus 322.7 million in the U.S.) lives mostly along its southern border with the U.S., where most Canadian trade takes place with adjacent U.S. states. Jason Clemons, economist and executive vice president of the Fraser Institute, a Canadian think tank, notes, “As a trading country, about one in two jobs in Canada is directly or indirectly related to trade. And over 70% of our trade is with the United States. These issues are going to be material in terms of Canada’s wellbeing and our ability to create good jobs. To the extent that Canada has interest in the outcome of the U.S. election, it’s hard to look at any other two countries [in the world] that have that kind of [close] relationship.”
Arguably, America’s bilateral trading relationship with Canada is even more important for the U.S. than U.S. trade ties with Mexico or even with China. According to the U.S. Census Bureau, Canada was responsible for 15.3% of all U.S. foreign trade (exports and imports combined) in April 2016 — a higher percentage than for any other U.S. trading partner, including second-ranked Mexico (14.8% of total U.S. trade) and third-ranked China (14.7%). Canada was also America’s largest single export market (18.6% of all U.S. exports) and its third-largest source of imports (13.1%). For Canada, the U.S. is an even far more significant trading partner, accounting in 2014 for 10 times more Canadian imports and 20 times more Canada exports than did China, which was Canada’s next greatest trading partner, according to Statistics Canada, a government agency.
Canada’s close relationship with the United States brings both positives and negatives, says Corinne Pohlmann, senior vice-president of national affairs for the Canadian Federation of Independent Business. Of CFIB’s 109,000 privately owned member companies, 50% import from and 25% export to the United States. For Canadian firms, “trade is incredibly important, especially trade with the United States,” she says. “Among our membership, those who do trade, it is primarily with the United States. That’s always where they start. There is the NAFTA agreement; the language and culture [of the U.S. and Canada] are similar. It becomes a much easier place to expand your market first.”
“I think a lot of Americans — politicians included — don’t understand how much they rely on the Canadian trade.” –Corinne Pohlmann
Thanks to the tight integration of the two countries’ industrial supply chains, Canada also counts a great deal more for the U.S. economy than most Americans might imagine. According to May 2016 report by Trade Partnership Worldwide, a trade research and advocacy firm, nearly nine million U.S. jobs depend on trade and investment with Canada. That reflects not just the value of finished U.S. imports from Canada, but the fact that Canadian content — raw materials, parts, components and services later used to make goods and services inside the United States — comprise 78% of U.S. imports from Canada. The above study adds that U.S. protectionist policies, including those such as Buy America policies that give preferences to U.S.-based suppliers for infrastructure projects, “can have an adverse impact on U.S. companies, workers and infrastructure projects. Up to 70,000 U.S. jobs are associated with U.S.-Canada supply chains in sectors affected by Buy America rules.”
Although most of the populist rhetoric in the U.S. presidential campaign is directed against Mexico, not Canada, Pohlmann notes, “We [Canadians] get sideswiped in the process. I don’t think there is a proper understanding [in the U.S.] that when they make these comments or push for these sorts of measures, the impacts go far beyond just the Mexico-America relationship. I think a lot of Americans — politicians included — don’t understand how much they rely on the Canadian trade as well. When you talk about the automobile sector and the agricultural sector” — that is to say, trade in vehicles or beef — “it’s all integrated today [with Canada].… It is sort of one unit.”
Morris Cohen, Wharton professor of operations, information and decisions, argues that Trump’s campaign vow to tear up current U.S. trade agreements and replace them with better alternatives, ignores the advantages that both the U.S. and Canada derive from NAFTA-fostered integration of U.S. and Canadian manufacturing supply chains. According to Cohen, “NAFTA, from a manufacturer’s perspective, makes it as if there is no [U.S.-Canada] border. You see a very high level of integration that people don’t fully appreciate, between factories on either side in Canada or Mexico, and corresponding factories just across the border. It’s as if there was no border.”
Cohen notes that these factories “are suppliers of components and of major products, and trade goes back and forth. They don’t even have to be inspected when they cross the border; they just drive a truck across the border and deliver their goods without any tariff. This has created an enormous amount of economic activity…. I’m pretty sure that all the economic studies have shown that NAFTA has had a net positive benefit to all three countries.”
The bigger issue is around manufacturing, Cohen adds. “Are we losing our industrial base, and where are the jobs going? You could argue that the economic value of a lot of American companies is based on their access to products that are imported through NAFTA, and allow them to be competitive in global markets. If you take that away, then they become less competitive.”
“NAFTA, from a manufacturer’s perspective, makes it as if there is no [U.S.-Canada] border.” –Morris Cohen
To reduce costs and improve productivity, “Intermediate goods [used in the assembly of a vehicle, for example] are passing across the border constantly,” notes Fraser Institute’s Clemons. “From a Canadian perspective, if that is disrupted by new trade regulations or country of origin regulations, there are a whole bunch of things that [a new president] could do by executive order or through the regulatory state. And if this leads to disinvestment in Ontario or Quebec, those [plants] are not going to come back [to Canada] …. That’s not just a short-term blip; that could have long-term ramifications for manufacturers and related industries in southern Ontario and part of Quebec.”
Cohen points out that the Ontario towns of Oakville and Oshawa have long been centers of the auto industry in Canada; Ford operates a plant in Oakville, and GM in Oshawa. “Those factories are tightly integrated into global supply chain networks of their companies. There is no border as far as these companies are concerned. How is this going to come back? It won’t come back.”
The ‘Next Big Test’
If cross-border investments were somehow forced by a protectionist U.S. presidential administration to return from Canada to the U.S., notes Cohen, “it wouldn’t be viable. Our cost of products would go way up. It doesn’t make sense; I don’t believe that it could be implemented. I think [the candidates are] just saying what they think they need to say in order to get votes.”
“As an outsider, what is incredibly interesting is that on most issues, Secretary Clinton is actually more conservative than Mr. Trump,” Clemons says. “She certainly has a more developed world view, and a more developed, nuanced view of trade and relations between countries. But the reality is that both parties have shifted decidedly towards protectionism and nationalism. So the question in the Democratic Party is: What does a President Clinton actually have to do, given her commitment to Senator Sanders and others in the party? Because one of [Sanders’] key issues is trade. Given the integrated nature of our economy, [U.S. protectionism and nationalism] obviously pose an enormous problem for Canada.”
Regardless of who wins the election in November, a protectionist stance “could be incredibly damaging for the Canadian economy; and therefore for Canada-U.S. relations — which are already suffering quite a bit, from the Canadian perspective from the prolonged period of tension between [former] Prime Minister Harper and President Obama” over the Keystone XL pipeline issue, Clemons notes.
“The next big test is going to be TPP.” –Glen Hodgson
According to Glen Hodgson, senior vice-president and chief economist of The Conference Board of Canada, “The next big test is going to be TPP…. [There] are some things in the deal which Canadians are questioning.” For example, in the text of the TPP “the pace with which tariffs come off [imports of] autos from the Japanese is very different for Canada than it is for the U.S. We have done some analysis of this. It’s not really a level playing field necessarily for Canada.”
Hodgson adds, “It is important to maintain our relationship with the United States — from the Canadian perspective, the most important trading relationship. The [Obama] administration recommended the TPP to this Congress; now we’ll see how this proceeds. Arguably, we should just sit back and see if there is U.S. support for the deal, and then we vote about whether it’s in our broader interest. But the key [question] is: How do we maintain a preferred trade relationship with the United States? … If Congress says yes, it would be very hard for Canada not to say yes. Because if we are not part of TPP, we go back to NAFTA rules. But for the most part, those have been overtaken by TPP. That’s one test case.”
More positively, the U.S. and Canada have made good progress on harmonizing regulatory (rather than tariff) barriers to cross-border trade on everything from trucking to airlines to pharmaceuticals to food inspection. The fact that Prime Minister Justin Trudeau and President Obama have “been on the same page philosophically probably makes it easier to make progress about harmonization of regulations,” says Hodgson. “Having a more agreed North American model would make it better for Canada because it would reduce the cost of regulation. It would reduce the cost of trade with the U.S. in a whole array of goods and services. If we can adopt U.S. standards as our own, either explicitly or through mutual agreement, that should make it easier to build a North American trading platform [on trade and environmental issues] without regulatory barriers getting in the way.”
He adds, “The single most important test will be how we manage the TPP — and whether Congress will authorize it; and whether Canada can then find a way to say, ‘We should say yes because the Americans have said yes.’”