By Candace Sider, Vice President, Government and Regulatory Affairs, North America
The relationship between the U.S. and Canada is currently at a pivotal moment. Diplomatic relations are at a higher point than they have been in four years, but trade relations remain very much uncertain and it’s causing unease on both sides of the border.
Canada and the U.S. share the largest and most porous international border in the world. Free trade has been a boon to both countries. An estimated nine million U.S. jobs and 1.9 million Canadian jobs are tied to cross-border trade. Canada is America’s second-largest trade partner overall and largest export market for merchandise goods. Canada is also the number one export market for 35 of 50 U.S. states.
Yet, trade relations have been strained in recent years – from the forced renegotiation of the North American Free Trade Agreement, to the imposition of tariffs on Canadian steel and aluminum and duties, to softwood lumber, to disagreements over agricultural trade and the more recent cancellation of the Keystone XL pipeline by the newly formed administration of U.S. President Joe Biden. Even more worrisome is the planned implementation of Buy American policies that could shut Canadian businesses out of U.S. government contracts.
All of these issues overshadow the shift taking place in Can-Am trade dynamics. Unsurprisingly, overall merchandise trade between Canada and the rest of the world fell substantially in 2020. Exports were down 12.3% year over year and imports down 8.6%. The total international trade deficit doubled during that time period.
Signs of Change
However, the early months of 2021 have seen a substantial reversal. Between December and January, international trade went into surplus for the first time since May 2019. Between December and February, Canada’s trade surplus with the U.S. grew more than 250% as export growth of 11% outpaced import growth of just less than 1%. Those are encouraging numbers further buoyed by projections of a faster and more pronounced recovery of the U.S. economy.
But the trade numbers are only half the story. Investment in Canada has seen substantial growth in recent years. In fact, the three years prior to the pandemic saw net inflows of investment from the U.S. grow 69%. That’s a striking figure considering the two countries were engaged at the time in often tense negotiations over the future of free trade that could have jeopardized those investments if the trade talks had gone awry.
The fact is that U.S. industry sees Canada as a strategic market for investment, particularly as risk in international trade has been heightened by trade wars, production shutdowns, container shortages, port congestion and consistently escalating transport costs. A recent PWC survey of global chief executives shows the percentage of U.S.-based CEOs that cite Canada as important to their overall growth doubled from 8% to 16% between 2020 and 2021. Meanwhile the percentage that cite China as critical to growth declined from 33% to 23% over the same time period.
Conversely, Canadian investment in the U.S. declined substantially during the three years prior to the pandemic, dropping just over 60%. While trade-related matters aren’t the sole culprit behind that number, there’s little disputing that protectionist sentiment and volatility in trade relations had some influence over the downward trend.
A Canadian Industry Perspective
In the coming months, Canadians will gain greater clarity on the Biden administration’s approach to trade and specifically the issues referenced above. Given that U.S. firms are setting their sights on greater investment in Canada and there is substantial room for recovery in Canadian investment south of the border, the urgency behind a harmonized approach to trade and regulatory policy, as well as post-pandemic border cooperation, is absolutely critical.
For this reason, the Canadian Chamber of Commerce recently established a strategic initiative involving a substantial number of Canadian companies across all sectors to monitor, review and respond to trade and economic policy as it happens. The views will reflect the mutual benefits of creating frictionless trade and reducing barriers to investment and opportunity.
Part of that effort will be to ensure Buy America policies don’t prevent Canadian businesses from fairly competing with U.S. firms for government contracts born out of the Biden administration’s proposed $2 trillion infrastructure spending bill. But it’s equally important to ensure that businesses feel confident that true cooperation is taking place to reduce excessive administrative and regulatory burden so that small and medium-sized firms can hasten their recovery through strategic cross-border partnerships and market opportunities.
As diplomatic relations between Washington and Beijing continue to deteriorate and the U.S.-China trade war remains at risk of escalating, U.S. firms will be turning their attention increasingly at regional supply chains. While that process is likely to occur over years, rather than months, ensuring the conditions to support continental, integrated supply chains are well established will go a long way toward reinforcing business confidence on both sides of the 49th parallel, and toward strengthening the historic economic ties between the U.S. and Canada.
Candace Sider is the Vice President of Government Relations and Regulatory Affairs, North America, at Livingston International. She sits on the boards of numerous trade and customs-related associations and advocacy groups, including the Canadian Chamber of Commerce’s Canada-U.S. Trade Council.