Canada: Diversifying, Getting Closer
There is considerable scholarly writing on the loss of American centrality in world affairs – the end of hegemony and the ‘rise of the rest.’ Canada stands in a special place in this discussion for historic reasons, but, as importantly, for its future interests. The next few years will be pivotal as the US tackles significant domestic issues, while at the same time finding a new place within a changing geopolitical environment. Those changes will in turn affect Canada in trade relations with both the US and the rest of the world – Canadian policies with respect to a wide range of issues from energy security, to climate change to Northern development and importantly evolving relationships within the hemisphere.
The great recession has impacted the US in a particularly striking manner. The effects have generated reduced consumer spending (for the first time in nearly two decades, although with some recovery in recent months) in the US. This means that the recovery will be different; growth for the US will necessarily need to come from exports, as government cannot continue for very long to fill the gap.
For Canada, which sends some 73 percent of its exports to the US, this could mean a significant readjustment and the end of business as usual (the first option). Other options for Canada that are frequently discussed include competing for a larger share of a smaller US market (second option); or diversifying into growing markets, primarily in Asia (third option). A fourth option explored in research undertaken at the Policy Research Initiative in Ottawa would be to use America’s global reach, by building a way into the American value chain.
None of these options are mutually exclusive. A fact that is of central importance is that the value of Canadian component parts flowing to the US has been increasingly reflecting changes predicted by both the ‘trade in task’ discourse and ‘new economic geography.’ In brief, there has been an organic trend toward the fourth option. Canada is increasingly becoming a producer of intermediate goods and services, and that needs to factor into a go-forward strategy in trade. The US-Canada border needs to be seen by US businesses as increasingly invisible, as they integrate across and along a value-chain that mixes US domestic and Canadian components and services toward a final global product. This speaks not only to the observable effects of the border, but also to the differences in regulatory environments in the two countries.
Trade in tasks suggests yet another dimension of exchanges across the US-Canada border. To be sure, there are the ICT-enabled flows of services, but, as well, there can be the potential for greater pressure to increase bilateral labour mobility more generally. There have been early forms of this observed in US state governors talking with Western Canadian premiers about the possibility of expanding the Trade, Investment and Labour Mobility Agreement (TILMA). This would not be a bad thing for Canada, given its older population and looming labour supply constraints – just as the US may be facing continued high rates of unemployment for some time.
As decision-makers think through the policies supportive of the fourth option, it is essential that Canada recognize that it does not have one single market with the US, but rather five distinct cross-border markets – each with its own distinct characteristics. Policy-makers should therefore be looking for coherence, not consistency, in their approach to these markets. It is equally important to strengthen the integration of Canadian relations with the US and Canada’s other NAFTA partner, Mexico, across all aspects of the agreement – not focussing exclusively on trade in goods. Focussing on a strong North American approach to global access recognizes and supports the US in its drive toward an export-led recovery, and hopefully continues to ensure Canadian access to what will be for a long time Canada’s most important national market (in its various component parts). Note: Finland, which, out of necessity, diversified dramatically away from its dependence on trade with Russia in the early 1990s, has found its trade with its old partner increasing as Russia’s economic resurgence progresses. Canada can learn from Finland, and perhaps secure the best by blending strategies.
Climate change, energy and the North (or the Arctic) are significant geopolitical issues; all play big on Canada’s medium-term agenda. They also all involve the US. Canadian policy will necessarily and wisely reflect the direction that the US will take; however, that does not mean that Canada will not be looking to influence that direction based on unique conditions in Canada. On climate change, that broad direction will likely mean putting a price on carbon, and that looks like it will take the form of a cap-and-trade regime. There is global experience with this mechanism, dating from policies to reduce sulphur emissions and their product, acid rain. Canada has the opportunity to learn from past approaches. The distribution of rents from carbon markets will be important as it affects investments. The sulphur experience suggests that leaving the rents in the private sector may promote more rapid innovation, as well as increase the speed with which new technologies are deployed. More research on that experience can usefully inform policies on carbon. Compelling evidence will be important, as it may be more difficult for the US, which needs to pay down a large and growing deficit, to go this route, although it is critical for ‘green innovators’ to know that their efforts have potential financing. The other aspect of carbon pricing – the calculation of carbon as a component of tradable goods – is one with which Canada has little experience. What remediation measures might be enacted at the US border, and how these are developed, will be important for Canada. And, indeed, an aggressive research agenda is needed here. The calculation of carbon is a technical, but nontrivial, matter, given the magnitude of bilateral trade with the US. Again, the fact that Canada is integral to the US value-chain is a Canadian asset, but also a key vulnerability.
On the energy front, it may be easy and reassuring for Canada to think in terms of North American energy security, but it is important for Canada to ensure that there is a common understanding with its close partner. Research is well-developed in the energy field, and the evidence suggests that complementary, if not common, regulatory regimes do prove most effective. Canadian policy on the North has a big American component in part because – once again – common, strong regulatory approaches to Northern development will help in what will be a delicate balance between development that benefits Canada’s Northern peoples and the preservation of a fragile environment. Common cause on the use of Northern waterways for trade will make life easier. On the other hand, potential disputes would force Canada into an uncomfortable and costly assertion of its sovereignty.
The last area involving Canadian relations with the US is broader relations in the Americas. Canada wants to, and can play, a larger role in the hemisphere. Recently, Canadian actions in Haiti following the January earthquake have been cited as a vehicle for positive involvement, and that role is taking shape in coordinated partnership with the US, which is also looking to remake its role in the region. Canada has a unique opportunity over the next few years to capitalize on a significant and credible public diplomacy effort. This also must occur in close awareness of US interests and the changing needs and ambitions of other regional players. The large increase in the Hispanic-American voting population will focus US political attention on the Americas – Mexico, to be sure, and the region in general. That focus will not necessarily take Canada’s interests into account, so there will be an increasing need to make Canadian needs known in Washington in a way that underscores Canadian capabilities and differences. Here again, scholarship can help and may be an effective tool in making the case for unique but coordinated roles.
Bref: The policy environment for Canada will be influenced more than at any point in recent memory by factors that emanate primarily outside of the country. The evolution of globalized trade, climate change, demand for scarce resources, the North and the evolution of the Western hemisphere are all critical to Canada’s future; all will be influenced by discussions that occur in the international arena. This does not mean that Canada cannot have influence. It does mean that Canada will increasingly need to carry voice outside of the country on a wide range of issues to ensure the conditions for success inside the country. It is within this context that the US, as Canada’s neighbour and closest ally, will carry an increasing, rather than diminished, importance in policy formulation over the coming years; and this in spite of the diminishing centrality of the US in world affairs. It is equally important that Canadian strategies be informed by the substantial body of research that is available to policy-makers, as well as by a national determination to effectively use that evidence as part of US-Canada dialogues.
Thomas Townsend is the Executive Head of the Policy Research Initiative (PRI). The PRI supports the Government of Canada’s medium-term planning through analysis and research on emerging issues.