Connected Cousins: The Canada-U.S. Economic Relationship

Dr. Paul Storer and Dr. Erick Lee EricksonNCSS Vital Issues Session on Economics, Denver 2010

“America’s Unhappy Borders”

The Economist, 8/27/05

Peace Arch Crossing

State Department Photo

Outline of Talk

• The Importance of Canada-U.S. Trade

- National and State Rankings

- “apples for apples” trade

- U.S. imports of energy from Canada

• Lessons from Canada:

- The recent recession and banking

- Health care

Source: Embassy of Canada

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

Canada’s Rank for States’ Exports of Goods

“Making Things Together”

• Many products cross the border several times during the production process. Finished products often have significant content from both countries.

• Trade is often “apples for apples”

• More than 40% of Canada-U.S. trade is within-firm trade (eg Ford or GM).

The Modern Canadian Economy:

ContinentalIntegration

&“JIT”

SeaTac Airport Shuttle Trains:

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

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

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

Krugman’s Model of Trade:Economies of Scale and

“Apples for Apples” Trade

Ford Edge:Oakville, Ontario. Canada cbc.ca

North American Specialization

Ford Escape:Kansas City, MO

Trade and Economies of Scale

• Example: cars in Canada before 1965

• Canada in 1964: home-grown car industry

• Prices were high, wages were low, choice was limited, businesses weren’t profitable.

• Solution: a North American auto industry

Car Production and Costs

• Very high fixed cost

• Lower cost per additional car

• Per-unit cost of one car very high

• Per-unit cost falls as we make more cars

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Average Cost (Cost per unit)

Economies of scale: average cost falling with production

Lowering Total Costs with Trade

• Canada makes crossovers for North America, U.S.A. makes SUVs for North America

• We save the fixed costs of two factories

• Costs are lower so wages and car prices improve

• We also get a wider variety of car models

Energy Trade

Canada: An Important Supplier

of Secure Energy

U.S. Petroleum Imports (2006)(Source: U.S. Energy Info. Agency)

U.S. Petroleum Imports (2006)(Source: U.S. Energy Info. Agency)

Source: http://www.pse.com/energyEnvironment/EnergySupply_NaturalGasProfile.aspx

Source: “The World’s Largest Trading Relationship”,

Embassy of Canada.

Oil Sands

Reserves

Source:

www.ubc.ca

Source: www.guardian.com

A Tale of Two Recessions

Why did Canada do better in the recession?

Source: The Economist

A Reversal of Fortunes

• 1980-99: Unemployment rates higher in Canada

• Fortunes are reversed beginning in 2000

• Reversal accelerates after 2007

• Canada hit harder in 1981 & 1991

• United States hit harder in 2001 and 2007

Unemployment Rates

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September 2010 - Canada: 8.0%, United States: 9.6%

Total Employment(January 2007 = 100)

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What Explain the Differences?

• The United States suffered through an atypical recession caused by the burst of a property “bubble” and the end of a financial crisis.

• The crisis in the United States hit construction jobs

• Mortgage losses reduced mobility in the United States. “Mismatch” (2010 Nobel in Economics)

Another Hypothesis:

U.S. Economic Policies hindered Adjustment andFlexibility

Example: 99 weeksOf UnemploymentInsurance

Why Canada Avoided A Financial Crisis

• Canadian home-price increases were more moderate

• Loan default rates were lower in Canada

• Canadian banks remained profitable

• No public bailout of Canadian banks!

Source: Bank of Canada Web site

(90 days plus delinquent)

Source: Federal Reserve Bank of Cleveland

Banks in Canada and Mortgages

• Six large, diversified, universal banks. All “too big to fail”

• Mortgage interest not tax deductible

• Much less use of mortgage brokers and loan securitization.

Health Care

Is the United States following the

Canadian path?

June 9, 2009

Source: http://www.health.gov.on.ca/English/providers/pub/ohip/physmanual/graphics/enhanced_card_security.gif

http://www.ghc.org/all-sites/images/membershipCards/ghc_med.gif

Provincial Health Insurance vs. U.S. HMOs

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Switzerland

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Health Care Spending, % of GDP, 2003

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The Post-9/11 Reality

How do we balance security

and integration?

Canada: A Source of

“Vulnerabilities?”

Source: Bellingham Herald

Source: ABC news Source: International Border Commission

“Alphabet Soup” Programs

DHS Secretary Napolitano: Hope and Change?

View #1: “the myth I’m trying to bust is that there’s no real border between Canada and the United States”

View #2: “We don’t want to damage economic security in the name of homeland security.”

Source: Globe and Mail