Canada depends on trade now more than ever before

Keith Norbury
January 24, 2017
By Keith Norbury

The election of Donald Trump as president of the United States has profound impacts for Canada’s economy. That’s because this country’s economic health depends heavily on trade.

Trump has sent some disturbing, albeit mixed, signals about raising trade barriers. Now, his main targets for trade sanctions are Mexico and China. And while he has threatened to tear up the North American Free Trade Agreement, Trump has indicated through his acolytes that he’s more or less OK with the state of Canada-U.S. trade. Then again, Trump himself is known to say one thing one minute and then tweet the opposite view the next day.

The thinking is that if Trump removes the U.S. from NAFTA that the existing U.S.-Canada free trade agreement would then hold sway. But neither that deal nor NAFTA specifically covers softwood lumber, which was subject to a separate bilateral treaty that has since lapsed. Fears abound that the Republican-controlled Congress, backed by a protectionist president, will succumb to the whims of the U.S. lumber lobby and again slap heavy tariffs on Canadian lumber.

A bigger worry is that scuttling NAFTA would harm Canada’s auto industry — a point enunciated by former Bank of Canada governor David Dodge following Trump’s election win, according to CBC News. That fear wouldn’t be realized as quickly as tariffs on lumber because of how heavily integrated manufacturing supply chains in Canada and the U.S. have become. But if Trump is serious about his goal of repatriating American manufacturing jobs, one easy target is those jobs north of the border.

The stark reality is that Canada’s economy depends far more heavily on trade than does the U.S. economy. In 2015, exports accounted for 31.5 per cent of Canada’s GDP, according to the World Bank. Meanwhile, about 78 per cent of Canada’s exports in 2015 were to the U.S.

For the U.S, however, exports accounted for 12.6 per cent of GDP in 2015, placing the U.S. among advanced economies with the lowest dependence on exports. Compare the U.S. with Germany, for example, where exports made up 46.9 per cent of GDP in 2015.

For the European Union, exports accounted 42.9 per cent of GDP, although much of that was among its member nations. But contrast that with exports in North America making up just 14.3 per cent of GDP in 2015.

The U.S., for all of Trump’s bluster about bad trade deals, just isn’t as dependent on trade as most of its peers. Even U.S. imports accounted for only 15.5 per cent of the country’s GDP in 2015. That’s less than half of the 33.8 per cent that imports contributed to Canada’s GDP in 2015.

It’s a dilemma as old as Canada itself. With only a 10th of the U.S. population, Canada depends greatly on that huge U.S. market for its economic prosperity. That same huge market, however, makes the U.S. far less dependent on the rest of the world.

Yes, economists almost universally predict that erecting trade barriers, as Trump has proposed, would harm the U.S. economy. But they’ll do far more harm to those countries that trade with the U.S. The country most at risk of harm is Canada.

For that reason, the much-maligned Comprehensive Economic and Trade Agreement that Canada signed with the EU — and which was nearly scuttled by Belgium’s Wallonia region — is looking like a good idea. Sure, critics have blasted the deal over its dispute mechanism, which they worry gives too much power to corporations, and the intellectual property rights provisions, which critics says is a sop to the pharmaceutical industry. But, seriously, CTEA is a deal between two parties that share the best of liberal democratic conventions and which have similar living standards and rules of law. It’s not a mismatch between an advanced economy on the one side and a developing backwater on the other.

If CTEA shifts Canadian jobs to Europe or vice-versa it won’t be because of labour costs. But it might be because of innovation or the lack of it. That freer trade inspires innovation is one of its signature benefits that is lost amid the worries about job losses and the inequitable distribution of the gains from trade. (Of course, those beneficiaries include not only captains of industry but also hundreds of millions of people in India and China who have risen from abject poverty, as well as poor people in the west who can buy affordable clothing at Walmart.)

If Canada and liberal democracies in Europe cannot trade fairly, then maybe there is little hope for the world. But this deal might just spare Canada from the worst effects of trade policies that a U.S. led by an unpredictable President Trump might enact.

— Keith Norbury

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