Teaching About the World’s Largest Trade Relationship

(and Why the Relationship is Important)

Study Canada Summer Institute 2015Dr. Steven Globerman

Source:http://sbadrinath.files.wordpress.com/2009/03/different26rqcu3.jpg?w=400&h=226

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Some Questions of Interest• Why is Canada so important to the U.S.?

• Why are trade and investment so beneficial to both countries?

• What is the nature of bilateral trade and investment?

• What are the “border priorities” of Canada and the U.S.?

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1. Canada is our largest trading partner ….

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1. … and we share the world’s largest bilateral trading

relationship. But not many people know this.

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Even the Wall Street Journal gets it wrong

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But they corrected their mistake

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Canada China Mexico Japan Germany Korea (South) U.K.0%

2%

4%

6%

8%

10%

12%

14%

16%

18% 16.6%

14.9%13.5%

5.1%4.4%

2.9% 2.7%

Country Shares of Total US Goods Trade (2014)

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China Canada Mexico Japan Germany Korea (South) U.K.0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%19.9%

14.7%

12.5%

5.7% 5.3%

3.0%2.3%

Country Shares of US Goods Imports (2014)

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Canada Mexico China Japan Germany U.K. Brazil0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20% 19.2%

14.8%

7.6%

4.1%3.0% 3.3% 2.8%

Country Shares of US Goods Exports (2014)

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2. Canada is the most important export destination

for 70% of the 50 states

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Source: http://www.canadainternational.gc.ca/washington/

Canada’s Rank for States’ Exports of Goods

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Source: Kasoff, Drennen, & Storer Chapter 17

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Time Trend for Canada’s Share of U.S. Trade

% of U.S. Imports % of U.S. Exports1990 18.4 21.6

1996 19.4 21.9

2000 18.7 22.7

2006 16.1 22.1

2010 14.3 19.3

2014 14.7 19.2

Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade Flows and Their Implications for U.S. Border Infrastructure Investment”

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Top Commodity Imports from Canada (2013)(U.S. $millions)

HTS 2013 Percent of Total Imports from

Canada87 Motor vehicles and parts 55,704 16.8

27 Mineral fuels 109,000 32.9

84 Mechanical machinery 19,752 6.0

48 Paper products 6,790 2.0

85 Electrical machinery 7,881 2.4

98 Special 10,176 3.1

44 Wood and products 7,884 2.4

Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade Flows and Their Implications for U.S. Border Infrastructure Investment”

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Top Commodity Exports to Canada (2013)(U.S. $millions)

HTS 2013 Percent of Total Exports to Canada

87 Motor vehicles and parts 51,702 17.2

84 Mechanical machinery 45,298 15.1

85 Electrical machinery 26,774 8.9

98 Special 8,890 3.0

90 Instruments 9,373 3.1

39 Plastics 13,047 4.4

27 Mineral fuels 24,658 8.2

73 Iron and steel 7,879 2.6

Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade Flows and Their Implications for U.S. Border Infrastructure Investment”

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Interesting Observation

• The leading “import industries” are also often leading “export industries”

Cases in PointMotor vehicles and partsMineral fuelsMechanical machinery Electrical machinery

This identifies the phenomenon of intra-industry trade (IIT) – more later

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Types of IIT

Example of Vertical:Canada exports crude oil to U.S.; U.S. exports refined

petroleum products to Canada

Example of Horizontal: Canada exports compact cars to U.S. U.S. exports SUVs to Canada

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Where Goods Cross the Border

U.S. Port Share of Total Imports from Canada

1. Detroit, MI 27%

2. Port Huron, MI 19%

3. Buffalo-Niagara Falls, NY 17.5%

4. Champlain-Rouses Point, NY 6.2%

5. Pembina, ND 4.7%

6. International Falls, MN 4.1%

7. Blaine, WA 3.7%

These 7 land ports process 55.5% of all imports from Canada.

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General Benefits of Trade1. Specialization by Industry

(Countries specialize in what they do most efficiently relative to other countries)

2. Specialization by Product(Companies specialize in a limited number of products to gain economies of scale)

Trade makes countries wealthier through the phenomenon of specialization.

The majority of trade is carried out by multinational corporations. Almost half of this latter trade is intra-firm.

So foreign direct investment is important.

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Not Everyone Benefits from Increased Trade

• There will be contractions in specific sectors of the economy with losses of employment

• How important is this phenomenon?

3. Canada is the biggest source of U.S.

petroleum imports

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Country Share of U.S. Petroleum Imports (2014)

Country PercentageCanada 36.7

Saudi Arabia 12.6

Mexico 9.1

Venezuela 8.6

Russia 3.6

Source: U.S. Energy Information Administration

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U.S. Exports of Oil to Canada Are Growing Rapidly

In April 2014, U.S. exported around 263,000 b/d of crude oil to Canada. That was 2.5 times as much as in April 2012.

In the same month, Canada exported around 2.7 million b/d to U.S.

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Other “Energy Facts”

• Canada is responsible for almost all U.S. imports of natural gas

• Canada accounts for all imports of U.S. electricity

• Canadian exports account for around 13 percent of U.S. coal imports

“Oil / Tar Sands”Source:The Economist 30

Oil Sands

Reserves• Source:• www.ubc.ca

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Oil Sands: Surface Digging Method

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• Source: www.guardian.com33

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The “Take-Aways”

The oil sands project is a major economic asset for Canada

Canadian oil companies have large sunk costs in the project

Environmentalists see the project as a nightmare – perhaps the single most controversial economic activity in North America

Keystone XLPipelineIssue

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Source: www.latimes.com37

http://nationalpostcomment.files.wordpress.com/2011/11/keystone-pipeline.jpg?w=62038

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Source:TheEconomist

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The Fly in the Ointment

• Native groups are opposed to oil pipeline proposals in Canada

• Where they have legal title to their land, they can block construction unless federal government is willing to invoke eminent domain

Lac Megantic Derailment & Explosionhttp://www.ctvnews.ca/polopoly_fs/1.1359962!/httpImage/image.jpg_gen/derivatives/landscape_960/image.jpg

Pipeline Alternatives: Rail

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The Economist’s Solution• GHG Emissions are an “external cost”

• Internalize the “externality”

• Put a price on carbon emissions

• Use will reflect the full costs

Problem: The externality crosses national boundaries. Countries must cooperate (not likely given Kyoto accord experience)

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4. Canada has a diversified economic base, but it has

struggled to develop a thriving high technology sector

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GDP Shares, April 2012

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The Modern Canadian Economy: Technology 47

Transportation

http://www.airlinereporter.com/wp-content/uploads/2012/05/ascrj700.jpg

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Adaptation: High-end Clothing

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Canada’s Banking Sector as a Paragon

• Canada avoided the sub-prime mortgage-related economic meltdown that hit the U.S. in 2008

• Many credit Canada’s banking regulations as the reason that Canada avoided the financial sector bankruptcies and mortgage default experiences of the U.S.

• Also, Canada did not experience the severe recession from 2008-2009 that the U.S. experienced

• However, Canada’s overall productivity performance continues to lag that of the U.S.• Since 1984, business sector productivity in Canada has

grown at half the U.S. rate

5. Canada-U.S. trade is often about trading

“apples for apples” and “making things together”

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Making Things Together:Specialization, Scale and“Apples for Apples” Trade

Ford Edge:Oakville, Ontario. Canada cbc.ca

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North American Specialization

Ford Escape:Kansas City, MO

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SeaTac Airport Shuttle Trains:

• Source: http://www.visitingdc.com/images/seatac-train.jpg 56

SeaTac Airport Shuttle Trains:Made in PA by a Canadian Company

• Source: http://farm4.static.flickr.com/3379/3198460812_79dd9093c2.jpg 57

Foreign Direct Investment

Seatac shuttle trains illustrate important phenomena:

1. There are many Canadian companies

operating affiliates in the U.S. and likewise for

U.S. companies;

2. A significant share of trade between the two

countries is intra-firm trade.

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6. The Canadian government has done a lot to improve

business conditions in Canada

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Some Measures Taken by Federal Government

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• Lowered corporate tax rates• Improved incentives for innovation• Reduced government debt/GDP ratio• Privatized Crown Corporations• Free trade agreements• NAFTA• European Union• Bilateral

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…Canada’s economy has performed well under free trade

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4

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10

12

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Unemployment Rate (%)

Canada

United States

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High Ratio of Household Debt to GDP is a Potential Problem for

Canada

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• Largely related to mortgage borrowing given relatively high housing prices to income in major Canadian cities.

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High Ratio of Household Debt is Seen as a Big Risk Factor for

Canadian Economy

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• Bank of Canada is concerned about a housing “bubble”

• Required down-payments on house purchases have been increased

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Canada Has a More Equal Distribution of Income Than the U.S.

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• Tax-transfer system is more “progressive”

• Larger share of government funding for services such as health care; education

•Top 1% Share in 2007

• 18.3%

• 13.8%

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7. Trade isn’t just goods: Trade in services and foreign

investment

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http://www.findfamilyfun.com/birch-bay-washington.htm

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• http://www.bloomberg.com/video/91845099/ 76

• The Economist, U.S. Edition, May 23, 200977

Source: http://hockeygonewild.wordpress.com/2010/03/09/

Identify the symbols and logos:

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http://www.flickr.com/photos/achimh/4368189976/sizes/l/in/photostream/79

8. Canada had a long history of protecting its economy from

U.S. competition

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The Tariff “Wall”

“Greedy”AmericanWolves

Happy Canadian Farmers AndManufacturers

Sir John A.Macdonald

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Source: Hart, M. A Trading Nation

Source: Hart, M. A Trading Nation

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Some Important Elements of Protection Still Exist

• Very high tariffs on dairy and poultry

• Canadian content rules for broadcasters

• Foreign investment restrictions in a number of sectors including banking,

telecommunications and transportation

• North American Content Rules

• http://news.nationalpost.com• /2012/03/31/tempest-in-a-• yogourt-cup-u-s-based-• chobani-seen-as-threat-to-• local-makers/

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9. Canadians and Americans have different “border

priorities”

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Canadian Priorities

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U.S. Priorities• Security (terrorism)• No “undue” border procedures

• Relatively quick inspection of commercial goods

• Relatively lenient visa permitting • Border infrastructure (second crossing for

Detroit-Windsor)

• Canada: A Source of “Vulnerabilities?”

Source: Bellingham Herald

• Source: ABC news • Source: International Border Commission88

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Priorities Away From the Border

Canada• Protection of Canadian culture• “Buy-American” programs• Keystone pipeline• Anti-dumping

U.S.• Intellectual Property Protection• Canada’s Defense Expenditures• Supply management programs

10. Canada-U.S. Trade: What Will the Future Bring?

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70%

72%

74%

76%

78%

80%

82%

84%

86%

88%USA Share of Canada's Exports

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The Canadian Dilemma • U.S. is a very important market for Canadian

exports

• But Canada has been “losing share” in U.S. market

• Should Canada try to diversify its markets, e.g. emphasize growing its trade with Asia?

• Should Canada “double-down” and make even greater efforts to increase trade with the U.S.?

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Successes or Failures?

Source: http://www.thestar.com/opinion/editorialopinion/article/1029360--the-cost-of-freer-trade 95

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Proposals to Expedite Commercial Border Crossings

• Perimeter security• Harmonize health and safety

regulations/reciprocal recognition of each country’s regulations

• Common external tariff• Expand border infrastructure (2nd bridge

connecting Detroit and Windsor)• Expand membership in Nexus

http://www.dol.wa.gov/images/DLsamples-EDLLg.jpg 97

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Pie-in-the-Sky

• Common currency

•Economic union

•Political union