Political Risk and Economic Security in Canada-U.S. Trade Relations

Canada is overwhelmingly the United States’ largest trading partner, with approximately 80% of U.S. foreign trade conducted with its northern neighbor; the same fact can be applied almost in the reverse regarding Canada’s trade relationship with the U.S. According to a report commissioned by the Canadian Embassy in the U.S., 7.1 million U.S. jobs are supported by Canadian companies.  Such a relationship is not a mere token of friendship, but is a matter of economic security for both countries. Certain events in the United States, however, threaten to jeopardize this relationship, constituting a “political risk” for Canada’s economic investment in the U.S.

 

With the U.S. economy still far from recovered and unemployment still high, any significant damage to trade relations with America’s chief, nay predominant, economic partner can only serve to the detriment of U.S. economic security as well. If the United States cannot properly manage its relations with the country with which it conducts so much of its foreign trade, Canada may well seek out options elsewhere. It’s not an issue of hurt feelings and sentimentality. It is about the strength and viability of the U.S. economy, something with which Americans cannot afford to be cavalier.

 

The Canadian economy has not greatly diversified its export base, and in some ways is a “petrostate” (some even call it an “energy superpower”). The value of the Canadian dollar is largely tied to the price of its major export commodity, oil. Yet Canada’s economy is much better suited to compete in the global market than other so-called “petrostates” such as Russia and Saudi Arabia, with a great amount of technological and industrial capabilities and ready access to the burgeoning economies of the Asia-Pacific region -- a fact further bolstered by the presence of Vancouver, Canada’s largest port, on the country’s west coast.

 

Although the Canadian dollar’s value is largely linked to oil prices, it is also a designated reserve currency -- the IMF declared it officially as such in late 2012, although on an informal basis the loonie had been used as a reserve currency for decades. The IMF’s decision was, in part, based on the Canadian economy’s relative stability in the post-financial crisis period. The Economist, in fact, has described Canada as having the strongest post-crisis economy of the G7 nations.

 

Iceland, which suffered a major collapse of three privately-owned commercial banks, had considered using the Canadian dollar as its national currency, and while it ultimately opted not to, Iceland’s choice of the Canadian dollar, as opposed to the Euro, one of the Scandinavian krone currencies or even the British pound, as a possible new national currency attests to the Canadian dollar’s strength. The Bank of England’s decision to invite Canadian banker Mark Carney to succeed Sir Mervyn King as Governor of the Bank is further testament to the strength and versatility of Canada’s economy.

 

The development of Canada’s economic ties with other global markets is already developing strongly. Despite both being signatories of the North American Free Trade Agreement (NAFTA), it’s rather easy to assume that because Canada is geographically separated from Mexico by the continental U.S. that Canada and Mexico are united only by their common, more domineering neighbor. Yet of late, Canada has been developing its own bilateral trade relations with Mexico, both within and outside the framework of NAFTA.

 

The Harper government has also famously pursued stronger relations with China. This isn't to suggest that Canada is “pro-China,” but Prime Minister Stephen Harper, as a trained economist, understands that China is an emerging market, and is only separated by an ocean. In fact, Mr. Harper’s foreign policy overall has demonstrated that Canada is not the soft “nice guy” on the international stage it has been so made out to be, and has shown that Canada is still very much a sovereign nation in control of its own destiny, and will act accordingly, something American conventional wisdom.

 

This is not the first time a strong Canadian leader has emerged willing to take steps to ensure what he felt was best for Canada economically. In 1972, Liberal Prime Minister Pierre E. Trudeau (who famously told CBC journalist Tim Ralfe “just watch me,” when asked how far he would go to deal with a political crisis in Québec), unveiled the “Third Option” which sought to increase Canada’s trade relations with Asia and Europe. This, however, was replaced by Trudeau’s second-term successor, Conservative PM Brian Mulroney, who implemented what evolved to eventually become Canada’s contribution to NAFTA, further shoring up Canada’s economic ties with the U.S.

 

The important difference with those state of affairs then and the reality of the world today is that much of the world was closed to the type of global trade that is now the norm today. The bipolar world of the Cold War has given way to a multipolar world with several emerging markets, many of which do not have their own adequate supplies of energy, thus strengthening the position of a state like Canada, which has ample amounts of energy to bring to market.

 

The Canadian response to the Obama Administration’s apprehensions regarding the Keystone XL pipeline underscores how important energy exports are to Canada’s economic security. It has become such an important issue in Canada that Canadians have warned that a rejection of the pipeline would result in a “deep freeze” in Canada-U.S. relations. The concerns of American environmentalists opposed to the pipeline are certainly valid, and it appears that a good-faith effort has been taken by the parties involved in the pipeline’s construction to find ways to build the pipeline without damaging the environment. The fear on the part of those in support of the pipeline is that if it's rejected, Canada (which is the largest foreign supplier of natural energy to the U.S.) will begin to direct its energy sales toward China.

 

Heightened border security after 9/11 has also taken its toll on Canada-U.S. trade relations. With the best of intentions (e.g., protecting both countries from the entry of terrorists, criminals, etc.), the tightening of the border has slowed trade relations. For instance, large cross-border shipments of products are held longer at customs, causing the companies in charge of production, logistics and receiving to lose valuable time and money, a deplorable situation only due to be exacerbated by the budget sequestration (which will have an effect on customs and border protection staff). This is a case-in-point of political risk, where political actions can cause an unfavorable environment for foreign investment.

 

If conditions of political risk are such that the risk-to-ROI ratio is too unfavorable for the investing party, the company will take its business elsewhere. This past spring the Globe and Mail has predicted that the U.S. governmental budget sequestration will have particular bearing on Canada’s defense industry, which will ultimately have implications for the U.S. national security, seeing as one of the cornerstones of Canada’s foreign policy has been engagement in various peacekeeping operations around the world (not to mention Canada’s strong role in the war in Afghanistan).

 

When all is said and done, if Canada does not find their trade relationship with the U.S. to be profitable, there is nothing to say that they won’t start taking their business elsewhere. The presence of a large French-speaking population gives its government and business community ready access to the Francophone markets in Europe and Africa. And as Canada’s immigrant communities become more integrated in their adopted homeland and rise to new levels in business, their language and cultural skills (which tend to be well-preserved in the Canadian “mosaic”) may well serve to give Canada greater access to other emerging markets in Asia.

 

Overall, this means that the U.S. runs the risk of undercutting its largest foreign trade relationship, a vital aspect to the U.S.’s economic security. While the Canada-U.S. relationship is strong, business always rules the day, and Canada will take its business where is best for its national economy. The Canadian economy is relatively robust, and appears to have less to lose than the United States. For the sake of economic security, the U.S. would do well, then, to seek ways to take better care of Canada-U.S. trade relations. While Americans may be taking steps to protect its border and its environment, trade is also a major component of national security, and it would be unwise to trade one facet of security for another.