Teaching About the World’s Largest Trade Relationship

(and Why the Relationship is Important)

Study Canada Summer Institute 2016Dr. 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.?

• What is the nature of bilateral trade and investment?

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

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

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1. Canada is our largest trading partner ….

Barely, if one includes trade in services with trade in goods

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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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Total U.S. Exports Plus Imports of Goods and Services ($ billions - 2015)

Country Total Percent of TotalCanada 669.4 13.3

China 664.4 13.2

Mexico 592.6 11.8

Japan 272.0 5.4

Germany 236.9 4.7

UK 234.9 4.7

Korea (South) 148.5 3.0

France 114.8 2.3

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Total U.S. Trade($ billions - 2015)

Exports Imports

Goods and Services 2,261 2,762

Goods 1,503 2,248

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Country Shares of Total U.S. Goods Trade (2015)

China 16.0%

Canada 15.4%

Mexico 14.2%

Japan 5.2%

Germany 4.7%

Korea (South) 3.1%

UK 3.0%

China displaced Canada as the United States’ largest trading

partner in goods in 2015

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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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But this is largely because China exports so much to the U.S.

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Country Shares of Total U.S. Goods Imports (2015)

China 21.5%

Canada 13.2%

Mexico 13.2%

Japan 6.2%

Germany 5.6%

Korea (South) 3.2%

UK 2.6%

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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As recently as 2000, China accounted for only around 8

percent of U.S. imports of goods

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But Canada is still the largest market for U.S. exports of goods

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Country Shares of Total U.S. Goods Exports (2015)

Canada 18.7%

Mexico 15.7%

China 7.7%

Japan 4.2%

Germany 3.3%

Korea (South) 2.9%

UK 3.7%

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 (but Midwest states are particularly dependent on trade with Canada)

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

Canada’s Rank for States’ Exports of Goods

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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

2015 13.2 18.7

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

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Summary

• Canada’s share of U.S. trade has been declining since 2000

• This largely reflects the growth of Chinese exports to the U.S. and Mexican exports (to a lesser extent)

• But will China’s exports to U.S. start to level off (or even decline)?• Growing number of trade actions against China• Hostility to state-owned enterprises

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Top Commodity Exports to Canada (2015)(U.S. $billions)

Industry 2015 Percent of Total Exports to Canada

Motor Vehicles and Parts 47.6 16.9

Machinery 42.8 15.3

Electronic Equipment 24.8 8.8

Oil 21.3 7.6

Plastics 12.6 4.5

Medical & Technical Equipment

8.5 3.0

Aircraft 7.8 2.8

Iron and Steel Products 6.2 2.2

Furniture 5.1 1.8

Paper 4.9 1.7

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Top Commodity Imports from Canada (2015)(U.S. $billions)

Industry 2015 Percent of Total Imports from Canada

Oil 74.8 25.3

Motor Vehicles and Parts 55.7 18.8

Machinery 20.1 6.8

Plastics 10.8 3.6

Wood Products 8.6 2.9

Aircraft 8.4 2.8

Electronic Equipment 7.6 2.6

Aluminum 7.3 2.5

Paper 6.6 2.2

Gems and Precious Metals 6.4 2.1

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Interesting Observation

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

Cases in PointMotor Vehicles and PartsMineral fuelsMachinery Electrical EquipmentAircraftPlastics

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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U.S. Crude Oil Imports (2015) (1,000 barrels per day)

Country VolumeCanada 3,223

Saudi Arabia 915

Mexico 761

Venezuela 717

Colombia 413

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

In 2015, U.S. exported around 154.2 million b/d of crude oil to Canada. The U.S.

exported 48.7 million b/d in 2013.

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Other “Energy Facts”

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

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

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

“Oil / Tar Sands”Source:The Economist 39

Oil Sands

Reserves• Source:• www.ubc.ca

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Oil Sands: Surface Digging Method

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• Source: www.guardian.com42

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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

U.S. Government has blocked building of Keystone Pipeline

Keystone XLPipelineIssue

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http://nationalpostcomment.files.wordpress.com/2011/11/keystone-pipeline.jpg?w=62046

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Source:TheEconomist

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The Flies 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

• China’s growth is slowing. Will they need natural resources to the extent previously forecast?

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, March 2016

Sector $ CDW (billions) PercentageServices 1,174.5 70.4

Real Estate 217.8

Finance 117.2

Health Care 113.4

Manufacturing 174.8 10.5

Mining 132.5 7.9

Construction 115.7 6.9

Utilities 37.6 2.3

Primary 33.3 2.0

The Modern Canadian Economy: Technology 55

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”

(Recall intra-industry trade)

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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 64

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

• Source: http://farm4.static.flickr.com/3379/3198460812_79dd9093c2.jpg 65

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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70* The 2014 ranking is the same as 2013.

…Canada’s economy has performed well under free trade, but productivity has not improved

as expected

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Unemployment Rates

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• Canada had lower unemployment rate than the U.S. from 2008-2013

• May 2015 unemployment rates:Canada = 7.1%U.S. = 4.4%

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 (up to 20%)

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 of Income

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U.S. (2014) = 21.2%

Canada (2013) = 10.3%

7. Foreign Direct Investment

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Stocks of Foreign Direct Investment (2014)

Outward (Canada)

Country Millions CDN $ Percentage of Total

U.S. 349,965 42

Other 478,847 58

Inward (Canada)

Country Millions CDN $ Percentage of TotalU.S. 361,372 49

Other 370,891 51

By contrast, Canada accounted for slightly less than 10 percent of the stock of foreign direct investment in the U.S. in 2014.

U.S. direct investment in Canada accounted for around 8 percent of the stock of U.S. outward foreign direct investment in 2013.

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Canadian banks have recently been large investors in the U.S.

e.g. In 2015, the Royal Bank of Canada purchased the largest

private wealth management bank in L.A. (lots of movie stars’ money).

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8. Canada has 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

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)

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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

922015 = 76.7%

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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• Pre-clearance arrangements (agreed to)

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Pie-in-the-Sky

• Common currency

•Economic union

•Political union

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Overall Conclusions• Bilateral economic relationship remains of major

importance

• But direction of relationship is unclear• Separate negotiations for free trade agreement

with EU• Presidential candidates’ rhetoric about “unfair”

trade agreements• TPP seems unlikely to be implemented• Hostility to fossil fuels