It was fun while it lasted, America: Pulling the plug on U.S. trade dependency
The United States receives over 75 per cent of Canada’s exports and contributes to just over 50 per cent of its imports. These are statistics that you have likely heard before, but they beg the question: should we continue this relationship with the U.S.?
Canada has reason to be concerned about its trade relationship with the U.S. given the election of Donald Trump as president. With his “America First” attitude, Trump has become a thorn in the side of our relations, with Canada receiving a significant number of calls to diversify its markets and pursue new trade partners. Canada recently signed the Comprehensive and Progressive Trans-Pacific Partnership, renamed after the U.S.’ withdrawal from the original agreement, which is purported to be one of the largest trade partnerships in the world.
These moves are reasonable considering the recent elevated tariffs on steel and aluminum exports to the U.S. While reports suggest that Canada will be exempt from these tariffs, ambiguity from the U.S. has the Bank of Canada maintaining overnight rates around 1.25 per cent. This reflects Canada’s cautious stance towards the situation.
The U.S. last imposed tariffs on steel imports in 2002. While Canada was exempt, the European Union was not excluded and took the U.S. to the World Trade Organization’s reconciliation commission. The U.S. eventually backed down after the WTO allowed the EU to impose reciprocal tariffs on American exports. A similar response was enacted by the EU to the new tariffs, this time targeting products from major swing states, such as oranges from Florida, cranberries from Wisconsin, and peanut butter produced in both Florida and Georgia.
A report released recently by, The Trade Partnership,a consulting firm, highlights the issues surrounding Trump’s proposed tariffs, exposing that there are over 145,000 American jobs at stake. These developments come at a particularly sensitive time in which there is already a strained relationship between Canada and the U.S. as NAFTA negotiations heat up. Should the free-trade agreement crumble, Canada would most likely default to the WTO’s Most Favored Nation levels, or a pre-NAFTA bilateral trade agreement between the U.S. and Canada would emerge. It is a precarious time for markets as well; while Canada–U.S. trade has jumped to all-time highs during the Trump presidency, much of this is the result of the weak Canadian dollar.
Is this a positive development for Canada? Yes and no. Canada is enjoying the increasing publicity from the political rollercoaster it has been forced onto. But uncertainty remains about where the rollercoaster will take the country, putting it at a disadvantage not only in terms of relations with the U.S., but also with the rest of the world.
Should Canada diversify its markets? And if so, where should it look? Or should the country wait out the Trump presidency in hopes that the U.S. will move on from its affair with celebrity presidents and protectionist measures? These are important questions. To diversify, Canada will need to add value to its exports in new ways. NAFTA thus far has allowed Canada to lag in both research and development as well as innovation, and most of the value added to our exports occurs once they have left the country. Ultimately, Canada’s export industries must ensure that, in a post-NAFTA world, they will not be left at a disadvantage while looking for fertile ground to broker new free-trade agreements.
Losing NAFTA might result in an economic downturn for the manufacturing and agriculture sectors, but the results may be less dire than many have feared. Rather, the end of NAFTA may finally push Canada to move away from its reliance on the American economy. While this would weaken the Canadian economy in the short run, the International Institute for Sustainable Development, an independent research organization, estimates that Canada’s GDP would be back on track by 2021. In the same vein, Canada’s diversification would only lead to a stronger, or at least more resilient, position in the face of unpredictable U.S. politics.
The question of where to go is simple: Asia. The ASEAN, Chinese, and Indian markets all have astoundingly high growth rates and offer significant opportunities for Canada. This would not only force Canada to become more efficient, but would also encourage innovation, as competition with the U.S. would become a reality.
This is not to say we should give up on NAFTA; it still has a lot to offer, but perhaps less than originally thought. Even after NAFTA was instituted, Canada’s labour productivity gap persisted, remaining at roughly 75 per cent that of the U.S. Of course, the U.S. provides significant resources for Canadian businesses, so we should not simply turn away from our trade relationship. It would be irrational not to try and make NAFTA work. But whatever NAFTA’s fate, Canada needs to strengthen its competitiveness and resilience in the wake of political and economic uncertainty from its rowdy southern neighbour.
The Trump presidency may be one in a hundred, but it has pushed our trade dependency on the U.S. into a new light, and for that we should say, “Thank you, President Trump. We have taken the hint.”