“Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.”
Robert Frost
As our glacial spring morphs into summer like weather, we are also approaching a crossroads of sorts, a fork in the road if you wish. Over the last year, Canada’s government has been navigating a somewhat delicate road between its vital economic relationships with a volatile and more aggressive United States and attempts to diversify our trade and security relationships with like minded middle powers. At some point, most likely this summer, Canada will need to make some decisions that will require commitments. Moreover, despite the attractions of poetry, automatically taking the road less travelled may not necessarily be the best option as it could make a difference not compatible with our best long term economic interests. Yet, the more travelled road comes with its own challenges.
We are poised at the junction of two roads. First, there is the continuation our North American trade zone as currently embodied in the Canada-US-Mexico (CUSMA) trade arrangement with new emphasis on our trade with Mexico. This arrangement has been under siege of late with higher tariffs levied on our auto production, steel, aluminum and forest products. Yet about 90 percent of our exports still flow tariff free into the United States and our economy has been surprisingly resilient over the last year. This economic arrangement is the result of over a half century of North American economic integration and has benefitted Canadian energy producers, manufacturers and business in general. Despite the pronouncements of President Trump, it has also been of great benefit to the United States in terms of providing a market for its manufacturers, raw materials for its industries, and a secure fossil fuel energy source that is sold to them at a discount of between $10 and $20 a barrel known as the WCS-WTI differential. Indeed, Canada accounts for about half of the crude oil imported by the United States but it then re-exports some of it at the world price yielding a windfall to the US of nearly $20 billion annually.
The other approach is what can best be described as a New National Policy driven by the change and disruption in the US led world economic and security order. Essentially, in this approach, Canada will pursue trade and export opportunities with Europe and Asia for its goods and resources to build an east-west flow to complement the north south flows of CUSMA. This will be accompanied by investment in defence production and security arrangements with like-minded partners in Asia and Europe. In essence, Canada and its Arctic become a Zone of Transit for these east-west global flows. To some extent, the marathon trade and marketing trips undertaken by the Prime Minister to bring this about have been bearing some fruit. For example, our investment drought has taken a turn for the better with foreign direct investment in Canada hitting a $93 billion high. However, nearly half of that has come from mergers and acquisitions rather than the financing of new productive activity. While such a successful metric may befit the efforts of an investment banker Prime Minister, it remains that investment in productive capital rather than asset ownership rearrangement is what is needed to improve Canada’s poor real per capita GDP growth performance.
Of course, which road we will take is uncertain. On the one hand, Canada still relies on the United States for nearly three quarters of its export market and even without CUSMA, the fact is that the United States is a natural trade partner given we share the continent with them and the north south physiography of North America favours trade with the United States. As well, despite our pronounced flirtation with the EU and even hints of membership, realistically, that will require a level of political and regulatory integration of social and economic policies that will be blocked first and foremost by Canada’s provinces who after 150 years of Confederation have yet to address inter provincial trade barriers. At best what we are looking at is perhaps an “Associate EU Membership” that will boost trade, investment and defence but even there the reality remains that all the members of the EU have yet to approve full implementation of the Canada-EU free trade agreement reached in 2017.
Prime Minister Carney is of course aware of these challenges which is why it appears he is hedging his bets. On the one hand, he travels the globe making deals and dangling the prospect of Canadian military purchases of Korean submarines and Swedish fighter jets while maintaining that Canada must seek non-US trade partners. On the other, he remains open to deeper integration with the United States in some sectors with the likelihood that current arrangements in energy and auto manufacturing are what he wishes to continue. Of course, there was a time when some type of deeper common market arrangement with the United States with common external trade policies might have been the next step to deeper North American integration, but the actions and antics of the Trump administration have nixed that path with the Canadian public for the next fifty years. The point worth considering is that despite greater integration and a larger effective market, over the last few decades, our productivity has declined rather than grown with such advantageous access to the US market.
Ultimately, what Prime minister Carney seems to be signalling is that at this fork in the road, Canada will be travelling down both roads at once. It will pursue greater integration with the United States, if necessary, along the lines of the existing relationships in energy, steel and auto manufacturing but it will likely not expand or create new ones in either those areas or even other areas. At the same time, Canada will seek to expand trade with Europe and Asia especially with regards to energy and resource developments though even here, to put our money where our mouth is, we will need to build new pipeline and transport capacity. Moreover, we will need to offer some tangible evidence we are serious about diversifying away from the United States such as buying Swedish fighter jets or Korean or German submarines. Needless to say, the Americans will likely not take kindly to such impertinence given that their approach to trade with Canada seems to be “what is ours is ours and what is yours is negotiable”. How dare we spurn their wares.
Still, here we are and by summer’s end we are likely to get some answers as to whether or not Prime Minister Carney’s strategy is working. Stay tuned.
