Harris or Trump? For Canada, Post November 4th Is Going to Be a Challenge

 

As we move into the final sprint of the US election, it bears as always to pay attention to the economic implications for Canada.  Whatever one’s political priors or favorites may be in this election, in the end it needs to be realized that when it comes to US trade and economic interests, it does not matter whether Trump or Harris wins– American interests trump (no pun intended) Canadian ones.  And in the case of the economy and our trade relationship with the United States, be prepared for some tough bargaining.  While 2024 marked the 30^th Anniversary of NAFTA, it has since 2020 been replaced by the USMCA or CUSMA agreement with renewal talks beginning in 2026. 

 

Along with perennial sticking points like milk and dairy or softwood lumber, in the United States, despite what economists and evidence might say about economic growth and the benefits of trade in the wake of NAFTA and CUSMA, the debate will be shaped by the widespread belief that NAFTA in particular resulted in job losses and wage stagnation.   In the case of manufacturing, the accompanying graphic summarizes quite nicely why the Americans are going to be playing hardball.  In many respects, US manufacturing job losses did coincide with NAFTA. 

 

Figure 1 presents annual Canadian and American manufacturing employment from 1976 to 2023 using a dual scale since US employment and population in general is about ten times ours.  In 1994, there were nearly 19 million Americans employed in manufacturing and 1.8 million in Canada. In the decade afterwards, by 2005, US manufacturing employment fell to 16.2 million while Canadian manufacturing grew to 2.2 million.  In the wake of NAFTA, American manufacturing employment fell by 14 percent while Canadian manufacturing employment rose by 20 percent. 

 

 

 

 Since 2005, American manufacturing employment has declined slightly to 15.6 million while Canada’s declined to about 1.8 million where it has stabilized somewhat.  In other words, over thirty years, Canada has stayed flat in terms of total manufacturing employment (notwithstanding the rise and fall from 1994 to about 2010) while the US has seen a decline.  The good news is that since about 2019, as evidenced by the 5^th order polynomial smoothing line, both countries have seen a slight increase in manufacturing employment as a result of fallout from the pandemic, trade issues with China and the rise of onshoring production activities.

 

Yet those same polynomial smooths show a pretty consistent decline for the US since 1976 with Canada doing somewhat better.  True, Canada is not to blame for the decline in US manufacturing.  Both countries have seen a decline in manufacturing employment over time both in absolute numbers as well as a share of total employment.  It is not 1960 anymore.  There have been productivity issues in both countries as well as intense competition starting in the 1990s from China and other Asian economies as well as Mexico which is/was a part of CUSMA/NAFTA.  However, that does not matter.  For the United States, creating jobs in manufacturing will mean looking at all the players – including Canada.  It will not matter whether Harris or trump becomes President in this regard.  Notice has been served.

Canada must tailor trade practises for post-COVID world

The effects of COVID-19 will transform the international world order and affect Canada’s role in it.
First, the meteoric rise of China, with its aspirations of world leadership and greater respect, will come to a crashing halt. Despite the importance of China’s market to the world economy, there will be an increase in transactions and transport costs as the hyper-globalized pre-COVID world takes a pause given concerns about virus transmission.
There will still be global trade and travel but there will be new rules and precautions operating as a form of non-tariff barrier with resulting losses for producers and ultimately consumers. For Canada, trade with China will continue given the importance of our resource inputs to their economy. But they will eventually need us more than we need them and this should shape our trade policy accordingly.
Of course, there’s also the long-term fallout from the Chinese government’s delay in alerting the world to the seriousness of COVID-19 while simultaneously scouring the planet for PPEs. The Chinese government’s desire to be treated like a superpower runs counter to the leadership and stewardship we’ve seen over the last few months. With great power comes great responsibility, and perhaps the best example of it during the 20th century was the American assistance for European recovery. While self-interested, the Marshall Plan nevertheless helped former foes and allies alike rebuild their economies after the Second World War. Notwithstanding its later efforts, the Chinese government’s behaviour during the early phases of the pandemic has eroded trust. For Canada, the new rule in its international dealings with China should be trust but verify.
Second, the abdication of global leadership and retreat by the United States is nearly complete, reinforced by its chaotic handling of its own public health situation. While the U.S. has been far from perfect, during the 20th century it was a leader for free markets, international trade and humanitarian efforts to help bring about a better world. The last four years have seen a populist-fuelled retreat from this vision of America in the world and we will all be poorer for it. The COVID debacle in the U.S., due to a lack of coordination and response, sends a distressing message to its trade partners and allies. For Canada, there can be no retreat from dealing with the U.S. given its importance to our economy. But we can no longer assume that all American interests are automatically our own.
Third, given what has transpired with both China and the U.S., the Europeans and the United Kingdom will ultimately assert new leadership, engagement and involvement in world affairs though they will not always sing with one voice. The retreat of the U.S., the Chinese government’s lack of transparency and not-so-subtle bullying—combined with the ever-present Russian behemoth on their doorstep—means they will need to do more for themselves in terms of security and trade, and will need to reach out and strengthen their trade relationships around the world. Here, Canada has taken the first steps with the Comprehensive Economic and Trade Agreement but it must actively pursue opportunity and build further relationships. Trade agreements are not enough, you must work to implement them.
The ultimate result from all this uncertainty will likely be an even more competitive and multilateral world order with Russia, Saudi Arabia, India and Brazil constituting additional elements of change and disruption. Yet this world will also be a source of opportunity for a resource rich and diverse outward looking country such as Canada.
We can benefit, but we must be nimble and adaptable in this changing world. Canada must actively engage with all players, but on its own terms, and must seek like-minded allies who are also small trade-dependent economies with stable, democratic and market-oriented institutions. Canada, Australia, New Zealand, Taiwan and the Scandinavian countries can serve as champions of small open economies in this emerging and more competitive world order. A league of small open economies may seem naïve, but one should not underestimate the powerful effects of mice that roar.

This first appeared on the Fraser Institute Blog, May 12 2020.

International Relations & Trade Discussion Missing in Current Federal Election Campaign

Monday's Federal Leader's debate made nary a mention of international trade, our current dispute with China or even what is going on with the USMCA ratification in the United States.  With exports accounting for about 30% of our GDP, it is astounding that such an important issue is being ignored.  It is therefore worth re-posting the piece I had published early this week on the Fraser Institute Blog.

Canada needs more major trading partners beyond China and the U.S.

First Appeared in Fraser Blog , October 7^th, 2019

On the campaign trail, there’s little talk about Canadian trade policy and the repercussions of our current poor political relationship with China. The need to continue diversifying our trade is the elephant in the room this federal election.

In what seems to be explicit retaliation over the Meng Wanzhou Affair, China has detained Canadian citizens—putting a chill on business travel there—and essentially halted our exports of meat and canola. Any memories of Norman Bethune appear to have faded as China reveals its view of us as a small, inconsequential and puny power that should do as told. As a result, an important trade strategy—to diversify our trade away from dependence on what has also become a more capricious United States—lies in tatters.

The U.S. takes nearly 75 per cent of our exports, and despite recent bumps, has been by international trade standards a dream trade partner. It’s a large, rich, populous market literally on our doorstep where we share a close political and social culture, common language and history. It’s a market economy like ours with a strong rule of law. Subsequently, Canadians have not had to work very hard when it comes to exports given that the access to such a profitable market has historically been easy. A one stop export market for 75 per cent of your exports has become the gold standard of Canadian trade policy.

But Canadian business has been seduced by the prospects of China’s growing economy and the vision of a rich market of 1.4 billion people as a sort of future U.S.-like trade relationship. China has rapidly industrialized and is developing a large, dense and wealthy market. At first, it even seemed to be moving towards a more liberal market order in its economy.

Yet despite early promise, it would appear China is only playing lip service to liberal economic values and seems set on explicitly using trade relationships as part of its diplomatic and political arsenal, given that it views government policy and trade relationships as one dominion. Its recent behaviour raises an important question: Do we really want to ever be in a situation where 75 per cent of our exports are dependent on China’s market? Do we really want to give the Chinese government a quasi-monopoly over both our trade and political affairs?

It really would be the road to serfdom.

Despite the large dollar value of our trade relationship with China, it currently still only represents five per cent of our exports. Trade is about free exchange and mutually beneficial gains. If China wants our trade goods, we should certainly sell them as part of a free and open bargaining process. However, if it wants to use its economic relationships as a tool to get its way when dealing with countries on other issues, then we must protect ourselves. We are a small open economy dependent on trade and we must diversify our trade. Our recent efforts in negotiating agreements with the EU and the Trans-Pacific are only a start. We need many countries to compete for our business, but to do so we also need to show interest and compete for theirs. Part of this also involves reducing our own protectionism (agricultural supply management would be a good place to start).

If the Asia-Pacific is the future of trade, then look for opportunities in other wealthy Asian countries. Japan, India, Thailand, Vietnam, Taiwan, Singapore, Malaysia, Indonesia and the Philippines are all important economies that can serve as markets for Canadian products.

Moreover, instead of waiting for government-led initiatives, Canadian businesses should start the process themselves. Rather than placing all your eggs in a one-shot market-access strategy in the hopes that China can one day replicate our success in the U.S., shift your markets to other partners. Make sure there are a lot of them so no one country can ever hold our economy hostage. This should become the new gold standard for Canadian trade policy.

Canada and the New International Age

Well, it has been a breath-taking week in international affairs and the best indicator yet that so to speak, “Toto, we’re not in Kansas anymore.” By acting on a US legal request to arrest for extradition Huawei CFO Meng Wanzhou, Canada has earned an over the top response from China that to date has also been accompanied by the arrest of two Canadians in China on “national security” concerns.  The response of the Chinese government and media includes words like “revenge” and “heavy price” with respect to what Canada will face if Meng Wanzhou is not ultimately released.  This all comes at a time when China’s economy is increasingly seen as a source of opportunity for Canada with a desire to boost trade via sectoral agreements.

And to top it all off, President Trump has basically made Canada look like the ultimate puppet state by arguing that he could intervene in the dispute and let Meng Wanzhou off the hook if it was useful in securing trade concessions from China.  The Rule Breaker in Chief has made it apparent that he is just fine without a rules-based international order.  There really is very little that seems to distinguish the tenor of the President’s behaviour from that of other authoritarian leaders around the world.  God bless America for a constitution that has a division of powers and checks and balances for otherwise all of this could be much worse – as hard as that might be to believe.

It goes without saying that it is becoming an increasingly difficult time for a small open economy on the world stage.  Over the last year, the NAFTA negotiations with the United States and Mexico involved public insults directed at Canada’s leadership while Saudi Arabia had a major tantrum over our views on human rights issues.  Even if Canada had done a better job of politically tiptoeing around these assorted landmines, it remains that we would still get bullied because we are viewed as small and not of sufficient consequence.  Even China’s recent diatribes against us are really directed at the United States given that they can send it a message by targeting what they obviously perceive to be its “vassal” state.  So much for their respect for us.

While China undoubtedly has some valid points in this diplomatic dispute as expressed by its Ambassador to Canada in a recent Globe opinion piece, it remains that its behaviour is reflective of an insecure adolescent on the world stage.  When a country of 1.3 billion people that claims to be an up and coming world superpower unleashes such an stream of invective and vitriol on a small country of 37 million people, one does not see an injured party but a bully.  Only a bully terrorizes the small fry while treading lightly with the bigger kids.

So where is this going next?  Well, it is unfortunate Canada cannot seriously consider getting a membership with the European Union because quite frankly, it has become a pretty friendless world.  We can’t even rely much on our Anglosphere friends because Australia and New Zealand are small like us while the United States is on a world disorder frenzy and the British are busy immolating themselves over Brexit.  So, we are on our own.

We need to do what we do best.  Remain polite and play the hand that we have been dealt as best we can and ride out the storm.  Weather analogies are good - we can't control the weather, we only deal with it and Canadians are used to dealing with bad weather.  We need to reach out to the Chinese at a senior level and reassure them that we are doing everything we can to resolve this issue in a fair, responsible and rules based manner.  We need to reach out to the Americans and ask for reassurance that this is not just a trade manoeuvre and request that this matter be dealt with expeditiously.  If anything, we might want to try and bring the two sides together to seek a diplomatic solution though given the rhetoric to date we would risk getting side swiped by both sides. 

In the end, this will get resolved and life will go on.  Indeed, President Trump’s own words provide the best excuse for us releasing Meng Wanzhou immediately – obviously, he thinks the arrest is a trade bargaining chip and not a matter of national security.  If we were more opportunistic, that is exactly what we would do and stick it to the Americans given that they have no qualms about throwing us under the bus.  However, we are polite and follow rules.

However, once the dust has settled, we really need to re-evaluate and review our international relationships – especially those involving the United States and China.  In the case of the United States, given our economic integration and the fact that they take 75 percent of our exports, there is going to be little we can do except hope for the day when a new and more reasonable administration takes the White House.  We share a continent with the Americans and not with China and that is that.  They can be bullies too when occasion warrants but our ties with them have been long standing.  In a sense, we are not caught in the middle between China and the United States, we are with the US given our shared history and geography.

As for China, well that requires some more thought.  Given mercurial and aggressive behaviour on the part of China when they don’t get their way and their willingness to bully, we do need to be very careful that we do not become as dependent on their economy as we have become with the Americans.  I’m not sure the Chinese market is worth greater access to us given the potential costs to our businesses and our sovereignty when China decides they are unhappy with us and wish to punish us. Nobody likes being slapped around and if they do, you need to either break off the relationship or minimize contact via a more structured relationship.  It’s a big world and there are other customers for our wares.  We need to trade with countries that behave in a less vindictive manner when it comes to international issues.

Northern Economist in the Winnipeg Free Press

 

The View from the West

Harper seeking a sustainable Canada

By: Livio Di Matteo

February 13th, 2012

News headlines present what seem to be unconnected stories regarding government initiatives and yet there is an underlying strategy to what any government does. For example, recent weeks have seen the term "sustainability" being applied to describe federal government policies with respect to health transfers and pensions.
At the same time, there have been references to Canada forging new trade links with Asia and Europe. Coupled with all this is the looming federal budget, which is expected to unveil substantial budget cuts.
Linking all these items together is the agenda of Canada's present federal government, which can best be understood as a comprehensive strategy of national sustainability. That is, the pursuit of a strategy that will make Canada economically sustainable for the 21st century.
To borrow a Prairie metaphor, the government's vision is passing the farm on to our children via two policy pillars. First, is restructuring the public finances and second, the pursuit of an economic strategy designed to ensure long-term growth and opportunity by taking our trade eggs out of one basket.
Securing the public finances requires balancing the budget and making sure the national debt begins to decline as the prospect of rising interest rates and debt service costs may squeeze health and social programs.
The sustainability of government spending and elimination of the deficit in the long term requires government spending not rise faster than the resource base.
To this effect, federal health transfers will eventually rise at the rate of GDP growth. As for government pensions, there is ongoing discussion about reforms to Old Age Security to increase the eligibility age and thereby also limit spending. Eliminating the federal deficit primarily through expenditure reduction rather than revenue increases can also be seen as a calculated strategy of fiscal sustainability designed to keep our tax rates low for the purposes of international competitiveness.
Given that one third of our GDP is rooted in the export sector, Canada's economic viability also requires that we seek opportunities to grow our trading relationships. The pursuit of trade opportunities in Asia and Europe represents a long-term strategy to diversify our trade portfolio and is a departure from our monogamous historical trade patterns. First, we had Great Britain as our primary trade partner and directed most of our exports there. Then, we cultivated the United States as our trade partner, which at one point absorbed nearly 80 per cent of our exports.
Reliance on one major market for our goods makes us vulnerable to political and economic shocks. In the case of the U.S., while it represents a convenient and wealthy market for our wares, recent years have seen the Americans become increasingly inward looking and preoccupied with their border to the extent that trade with them has become increasingly more difficult. The shift away from the American market began during the world financial crisis and the Great Recession of 2009. Between 2005 and 2010, the value of exports to the U.S. dropped by 10 per cent and their share of our exports fell from 82 to 73 per cent. Over the same period, exports to the United Kingdom and Europe have grown as well as exports to other OECD countries, China and India. The pursuit of China as a market for Canadian energy also marks a departure from our previous continental approach to energy markets.
The federal government is following in the path of previous governments in crafting an economic strategy to secure Canada's sustainability as a nation. From 1867 to the Second World War, we were dominated by the national policies of land settlement, tariff protection and railway construction, which erected an east-west national space. The period from the end of the Second World War to the 1980s saw the pursuit of trade opportunities with the United States via agreements such as the Auto Pact with increasing dominance of the North American market leading to the 1988 Free Trade Agreement and NAFTA.
We are embarking on a 21st-century strategy of economic diversification with the pursuit of trade and investment opportunities with Asia and Europe. The continental economic vision of guaranteed access to the U.S. market has been increasingly under siege as a result of repeated lumber disputes, tighter border controls, and an economically weaker United States that is more inclined towards protectionism. In the face of these challenges to Canada's economic future, the government response is a strategy to balance the books and to make sure we will not be dependent on one international market for our future economic welfare. Who can really argue with that?

Livio Di Matteo is professor of economics at Lakehead University.

Republished from the Winnipeg Free Press print edition February 13, 2012 A10