Canada and the United States Enjoy an Economic Partnership Unique in the Contemporary World

Canada and the United States

Trade & Economic Relationship – Current Situation

Presented to:

Dr. Kenneth N. Matziorinis

by

Majida Boutanios

Orlena Lee

McGill Centre for Continuing Education

North America and Global Economy

CPL2-561-781

February 20, 2003

1

Canada-US Trade Relationship – Current Situation

AN OVERVIEW OF CURRENT TRADE AND ECONOMIC RELATIONS BETWEEN CANADA AND THE U.S.

Canada and the U.S. enjoy a distinctive economic partnership. We share the world's largest and most understanding trading relationship, which supports more than two million jobs in each country. Two-way trade between Canada and the United States has more than doubled since 1994. Trade crossing the Canada-US border every single day account for US$1.2 billion, which makes us each other's biggest trading partners. Canada represents 23% of the American international market (US$165 billion). The United States sells almost three times as many goods to Canada, a market of 30 million people, as to Japan, a market of over 125 million. Canada is a larger market for US goods than all 15 members of the European Union combined. The United States is the largest foreign investor in Canada and the most popular destination for Canadian investment.

Canadian Trade Performance overview (Third Quarter 2002)

The Canadian economy continued to expand in the third quarter of 2002, with real gross domestic product (GDP) increasing by 3.1% on an annualized basis. This growth rate was down from 4.4% in the previous quarter. The United States, in contrast, registered 4.0% GDP growth in the third quarter, up from 1.3% during the previous quarter, thereby outperforming Canada for the quarter.

A bounce back in exports coupled with a strong housing market supported Canadian economic growth in the third quarter, while consumer spending was flat and business capital spending slowed. Exports of goods and services increased by 10.8%, mainly due to a strong growth of shipments to the U.S. particularly of motor vehicles and parts. Canada's continued economic expansion also supported a broadly based 9.5% increase in imports. Export growth outpaced import expansion in the third quarter, contrary to the previous quarter. In the third quarter, job creation increased by 123,100 positions. The average unemployment rate in the third quarter rose to 7.6% from 7.5% in the second quarter. The overall Consumer Price Index (CPI) increased by 2.3% compared with the same quarter last year, up from a 1.3% increase in the second quarter of this year. The four-quarter increase in the CPI for core items (excluding food and energy) was 2.4%, up from the 2.2% recorded for the previous quarter. Thus, inflation-- the rate of change in the CPI--is on the rise. The Canadian dollar depreciated slightly vis-à-vis the U.S. dollar over the third quarter--from US$0.6432 to US$0.6399 (See Appendix #1 for Canada and US’s Economic and Trade Indicators third vs. second quarter of 2002).

Exports of Canadian goods and services increased by 10.8% in the third quarter, with merchandise exports expanding by 12%. Imports of goods and services increased by 9.5%, with merchandise imports rising by 11.4%. However, imports of services declined from the previous quarter. Export growth was especially strong to the U.S. and to non-OECD countries. The trade balance in the third quarter improved to $47.4 billion from $45.0 billion in the previous quarter.

Services exports increased by 2.5% in the third quarter--led by transport and travel services, while commercial services exports declined. Overall services imports recorded a 0.3% decline during the quarter. The service trade deficit of 10.1% recorded a fall by $400 million to $8.6 billion.

Overall view of Canadian-US trade

Canada buys nearly a quarter of all U.S. exports of goods.In 2001, the United States sold $163 billion worth of goods to Canada. Canada, bought an average of $5,254 worth of U.S. goods per capita. The United States bought $219 billion worth of Canadian merchandise, approximately $768 for every American.

Historically, Canada has been the leading foreign export market for U.S. goods. In the past 20 years, U.S. merchandise exports to Canada have quadrupled. In 2001, Canada was the leading export market for 37 of the 50 states. The United States leads the world in the export of services, ranging from computer software, to transportation, to professional expertise.

Canada continues to be a top customer, with purchases of $24 billion in 2001. U.S. exports of services to Canada rose by 3% over the previous year, while its exports to the world fell by 4%. Canada provided the United States with $18 billion worth of services in 2001. In recent years, the United States has consistently posted a surplus in services trade with Canada, while Canada has recorded a surplus in the exchange of goods.

In 2001, Canada's current account surplus decreased from $30 billion to $27 billion. The U.S. current account with the world showed a negative balance of $393 billion, 14% of all its international transactions.

Investment — inflows and outflows — is a key contributor to job creation and international competitiveness. In 2001, a record $25 billion in new direct investment flowed into Canada from the United States. The total U.S. stock in Canada at the end of the year amounted to $139 billion. The United States is by far the largest foreign source of capital in Canada, accounting for 67% of the total stock. This represented 10% of all U.S. direct investment abroad. The bulk of U.S. investment in Canada, 39%, was in the manufacturing industries, led by transportation, which made up 10% of the total. Finance, insurance and real estate together accounted for 27%, and petroleum for 17%.

Canadian investors spent almost $17 billion to acquire or establish businesses in the United States, more than any other country invested. Half of all Canadian direct investment abroad is in the United States. At the end of 2001, Canada had an accumulated total of $109 billion invested there, 8% of all foreign direct investment in the United States. Almost 37% was in the manufacturing sector, led by machinery firms with 15% of the total. Finance, insurance and real estate accounted for another 36%, and service industries for 5%.

Canada and the United States are involved in a profitable trade in automobiles, trucks and auto parts. In 2001, transportation equipment accounted for almost a third of both U.S. merchandise exports to and imports from Canada. U.S. manufacturers sold over $23 billion in motor vehicle parts, engines and engine parts, and $13 billion worth of automobiles and trucks to Canada. The United States bought $40 billion worth of autos and trucks and $14 billion in parts and engines from Canada.

U.S. exports to Canada also included $12 billion in high-tech equipment, in particular, $6 billion worth of computers and $2 billion worth of tubes and semi-conductors. The United States supplied Canada with a variety of other goods, including $8 billion in agricultural products, $3 billion in pharmaceuticals, $2 billion in organic chemicals and $2 billion in paper.

Canada's energy exports to the United States totalled $35 billion in 2001. Exports included $17 billion in natural gas, $10 billion in crude petroleum, and $6 billion in petroleum and coal products. In addition, Canada supplied close to 100% of U.S. electricity imports, worth $2 billion.

Canadian forest product exports amounted to $20 billion and included $6 billion in softwood lumber and $5 billion in newsprint. The United States also purchased $8 billion in airplanes, their engines and parts; $4 billion in aluminum and aluminum alloys; and $3 billion in office machines.

Canada’s Trade with U.S. Regions

The U.S. is the destination of over 87% of Canadian merchandise exports and the source of two-thirds of Canadian goods imports. For the purpose of our study, we will subdivide the United States into four regions (South, West, Midwest and Northeast). Canadian exports to the U.S. expanded by an average of 10.1% per annum from 1988 to 2001. Exports to the West and the South grew faster than the overall pace and captured increasing shares. At the same time, Canadian exports to the Northeast and Midwest declined. Nevertheless, the Midwest remains the most important destination for Canadian exports to the U.S., accounting for 41.0% of overall exports to that country in 2001.

In 2001, 63.1% of total Canadian imports originated from the US. Imports from the West expanded at a level proportionate with overall Canadian import growth and therefore maintained their share, about 11%, between 1988 and 2001. On the other hand, imports from the U.S. Northeast and U.S. Midwest grew at a slower rate than the overall Canadian average. It was Canadian imports from the U.S. South that expanded their share of total Canadian imports over this period. Although the share of imports from the Midwest declined from 47.7% in 1988, it still accounted for 43.1% of imports in 2001. The dominant role that the U.S. Midwest plays in Canadian trade is largely due to the importance of motor vehicle trade with this region (See Appendix #4, Table 2: Canada's Top Three Import and Export Commodities in United States Trade). Motor vehicles and machinery are the largest traded commodity between Canada and the United States. However, Trade in machinery is more evenly distributed across the four U.S. regions, Canada-U.S. motor vehicle trade is very much in favour of the Midwest. Reinforcing this dominance is the fact that the largest share of Canadian exports of mineral fuels is also shipped to the Midwest.

The importance of the U.S. South for both Canadian exports and imports has been rising in recent years. From 1988 to 2001, the share of Canadian mineral fuels exports to this region rose from 3.5% to 10.0%, while the share of machinery exports climbed from 20.4% to 26.0%. Motor vehicle exports to the region accounted for about 4.6% in both 1988 and 2001. The U.S. South is also an important source for all three of Canada's top import commodities. Between 1988 and 2001, the South increased its share of Canadian imports of motor vehicles from 10.2% to 18.7%. Meanwhile, its share of machinery imports rose from 15.7% to 23.2%, and its share of electrical machinery and electronics imports jumped from 23.3% to 33.8%.

The U.S. West region share of Canadian exports surpassed the share of the U.S. South in 2001. From 1988 to 2001, its share of Canadian exports of motor vehicles increased from 3.1% to 15.1%, and its share of shipments of machinery rose from 8.6% to 16.0%. The West region is the destination for about 1/4 of all mineral fuels exports to the United States. As a source for Canadian imports from the U.S., the West saw only insignificant changes in its share of motor vehicle and machinery imports, whereas its share of electrical machinery and electronics imports increased from 11.3% to 16.9%.

The Northeast accounts for almost 1/4 of Canada's exports to the U.S. and almost 1/5 of imports from the U.S., it has become less important to the Canadian trade. Canadian exports of mineral fuels and machinery to the U.S. Northeast declined from 1988 to 2001, while the region's share of Canadian motor vehicle exports fell from 22.2% to 6.6%. On the imports side, the Northeast saw its share decline during the period from 11.3% to 5.3% for motor vehicles, from 19.2% to 15.4% for machinery, and from 33.0% to 23.4% for electrical machinery and electronics.

TRADE IN GOODS AND SERVICES

In 1989, the United States and Canada signed the Free Trade Agreement (FTA) and in 1994, the North American Free Trade Agreement (NAFTA) went into effect. Between 1989 and 1994, bilateral trade increased by 50%.

According to the US Department of State, the major trade exports in 2001 for Canada are: motor vehicles and spare parts, lumber, wood pulp and newsprint, crude and fabricated metals, natural gas, crude petroleum, and wheat. 86% if 2001 Canadian exports went to the US. As for merchandise imports, they totalled $226.4 billion, they are: motor vehicles and parts, industrial machinery, crude petroleum, chemicals, agricultural machinery. 76% of 1998 Canadian imports came from the US.

Canada and the United States adopted the Smart Border Declaration in December 2001 to ensure the secure flow of goods and people across the Canada-U.S. border.

On March 5, 2002, U.S. President Bush announced that Canada would be excluded from U.S. restrictions on imports of steel. Canada continued to manage effectively a number of key issues, including softwood lumber and wheat. The following are some key points on major trade exports.

Energy

At $38 billion in 2001, U.S.-Canada trade in energy is the largest U.S. energy trading relationship in the world. The primary components of U.S. energy trade with Canada are oil, natural gas, and electricity. Canada is the United States' largest oil supplier and the fifth-largest energy producing country in the world. Canada provides about 16% of U.S. oil imports and 14% of total U.S. consumption of natural gas. The United States and Canada's national electricity grids are linked and both countries share hydropower facilities on the Western borders.

Agriculture

The U.S. is Canada's leading agricultural market, taking nearly one-third of all food exports. Conversely, Canada is the second-largest U.S. agricultural market (after Japan), primarily importing fresh fruits and vegetables and livestock products (see appendix #6 for major US agricultural imports from Canada). US agricultural exports to Canada totalled $7.6 billion in 2000. Major Canadian imports from the United States are fruits and vegetables (31 percent), animals and animal products (19 percent), and grain and feeds (18 percent). Canada is the largest export market for U.S. fruits and vegetables, with a total value of $794 million and $1,578.5 million, respectively, in 2000.

Of Canada's $27 billion in exports of wood, pulp, and paper in 2001, 80% went to the United States.

Steel

On March 5, 2002, President Bush announced a major decision to exclude Canadian exports from restrictions on U.S. imports of a number of steel products.

The decision ended eight months of uncertainty for Canadian steel producers, which means that Canadian exports will continue to flow unimpeded to U.S. customers. Of total Canadian steel exports of $3.6 billion, import restrictions could have been imposed on exports of six products valued at about $1.86 billion.

Services

In recent years, Canadian professional services providers (e.g. engineers, accountants, architects, legal consultants and geologists) have increasingly exported their expertise abroad. Canadian engineering consulting firms rank among the leaders in total international billings. Canadian law firms are well placed to take advantage of business opportunities worldwide, as Canada functions within the two main law regimes (common law and civil law). Canadian accounting firms are moving to develop international alliances in addition to the national or interprovincial affiliations that some have established. Our architectural firms have undertaken projects in areas in which they are recognized world experts (school buildings, airports, Arctic design and construction technology, and office complexes) and are particularly active in the Asia-Pacific region.

Canada has evolved from a rural, commodity-based economy to an urban services-dependent economy with a large manufacturing base. Since Canada is the largest export market for 35 to 50 States, the U.S.-Canada border is extremely important to the well-being and livelihood of millions of Americans.

MAJOR TRADE ISSUES BETWEEN CANADA AND THE US

Lumber

Softwood lumber is one of Canada's largest exports to the United States, with over 18.6 billion board feet of lumber shipped in 2001 alone. Those exports were worth $9.4 billion (US$6.1 billion) and comprise an important element of the largest trading relationship in the world.

On April 2, 2001, following the expiry of the 5-year Canada-US Softwood Lumber Agreement, the US lumber industry requested the US Dept. of Commerce to investigate the countervailing and anti-dumping of softwood lumber products in Canada, which was accepted. In October 2001, dumping margins was established at 12.58% for all Canadian exports to the US.

This trade matters to both Canadians and Americans. Canadian sawmills employ over 80,000 Canadians, and roughly 300 communities are dependent upon the forestry sector. U.S. lumber producers cannot meet domestic demand for softwood lumber: therefore, Canada now supplies over a third of the United States' consumption of this product. The U.S. housing and other industries, which employ over 7 million American workers, have come to rely upon unfettered access to this quality product.

Resolving the softwood lumber dispute remains a top Canadian trade priority. To this end, the Canada has challenged the U.S. determination of subsidy before the World Trade Organization and under the North American Free Trade Agreement, and has held WTO consultations concerning the U.S. determination of dumping. At the same time, the Canadian government remains open to discussions with the United States for a mutually acceptable solution to this dispute.

Canada produces about 28 billion board feet of softwood lumber annually and 18.3 billion board feet were exported to the United States in 2000. Thirty-five percent of the softwood lumber used in the US comes from Canada, the world’s second-larges producer behind the US.

The US has blamed low prices on Canadian imports of softwood lumber, which is made from fir, pine and other cone-bearing trees. Therefore, the US government has added duties and tariffs of about 32% of the cost of most Canadian softwood. While US lumber companies benefit from the new duties on Canadian imports, other US industries using such materials lose out because they are forced to pay higher prices.

US Farm Bill

On Feb. 13 2002, the US Senate passed its version of a new Farm Bill. The Senate version would provide for increased spending on production-distorting subsidies, reinstate abandoned ones (e.g. for honey) and extend them to new commodities such as peas and lentils. The Senate Bill would also require mandatory retail-level country-of-origin labelling for meats, as well as fruits and vegetables, and deny U.S. grading to U.S. meat obtained from Canadian animals slaughtered in the United States. Canada has expressed serious concerns about the Farm Bill proposals, in particular, the increase in trade-distorting domestic support, and provision on meat grading and the mandatory country of origin labelling requirements.

Agricultural Subsidies

All WTO members have agreed to decrease domestic support of agriculture; however, the US has not respected this decision and continues to increase spending on trade-distorting forms of support in this field. Canada is concerned about the high and rising levels of domestic support to agriculture in the US, especially to grains and oilseeds production, which contributes to the worldwide supply-demand imbalance that keeps prices down. Since the US is subsidizing the export of its agricultural products, they have a price advantage over other countries. Therefore, Canada is fighting to keep prices down.