Canada-US Trade: A Pillar of Economic Strength

Canada and the United States have the world's most comprehensive trading relationship, supporting millions of jobs in both countries. We are each other's top trading partners, with approximately $3.6 billion in goods and services crossing the border every day in 2023. Many of these items require co-investment and co-development, making our networks extremely linked. Canada and the United States also have a strong investment relationship. The United States is the single largest investor in Canada, and Canada was the largest source of foreign direct investment (FDI) in the United States as of the end of 2022. In addition, Canada is the single greatest foreign energy supplier to the US.

For nearly four decades, commerce between Canada and the United States has been governed by a series of free trade agreements, the most recent of which, the Canada-United States-Mexico Agreement (CUSMA), went into effect in July 2020. CUSMA underpins our strong, balanced commercial relationship with the United States and Mexico, which is based on resilient and effective supply chains in all essential sectors of the economy.

Living adjacent to the United States provides fewer benefits.

So, why diversify? The basic answer is that living next door to the United States is no longer as exciting as it once was. Part of the reason for this is President Donald Trump's administration's disturbingly protectionist stance, but the foundation of the problem goes back much further.

In the last 15 to 20 years, the United States has not been the worldwide growth engine that it once was. The United States' share of global growth has been nearly reduced in half during the last two decades, from around 32% in the 1990s to roughly 17% this decade. According to our examination of World Bank trade data from the Institute for Competitiveness and Prosperity, Asia's contribution has increased from 32% to slightly more than 50% during the same time period. This has posed a double difficulty for Canada. First, we are severely underexposed to emerging world economies, so we benefit little from their rapid acceleration. In addition to the 75% of our commerce that goes to the United States, the other 10% flows to other slow-growth advanced economies, primarily in Europe. Only approximately 9% of our commerce is with rapidly rising emerging economies such as China, India, South Korea, Mexico, and Brazil. This is far lower than our peers. Germany has a 20 percent share of exports to emerging markets and other developing countries; Japan and the United States have 30 percent; and Australia has 40 percent.

Asian markets are viewed as dangerous.

Emerging markets, particularly Asian markets, are sometimes viewed as distant and unfamiliar. They are perceived as riskier and more expensive to access. The effects have been harsh. In the last 15 years, Canada's share of the global export market has decreased from roughly 4.5 percent to under 2%. Part of this tendency was unavoidable when large developing market countries entered the global trade and investment network, but Canada's decline has been especially rapid.

Canada has had the second worst performance among the world's top 20 exporting countries since 2000, trailing only Japan in terms of trade share reduction. Canada is losing share in the United States market, which is losing share globally. Instead, we should concentrate on increasing our market share in growing markets. This entails diversifying our commerce with rising market economies, particularly in Asia. Start with Asia's two largest economies, India and China. The new USMCA has clauses that allow signatories to withdraw from the agreement if one country seeks a separate free-trade arrangement with a "nonmarket country" — namely, China. But that should not be an impediment to this pivot.

Are the American and Canadian economies intertwined?

For example, running a large steel and iron foundry is no longer profitable, thus mini-mills produce almost all steel. These mills, which specialize in producing a specific product, are located in the United States and Canada. The issue is that many critical products are only manufactured on one side of the border. It is quite impossible to get them from within your own country. This is epoxy-coated rebar. It is used to reinforce concrete that will be exposed to salt water, such as bridges in cold areas or structures built in the ocean. It's made by only one business in Canada. It is utilized throughout the northern United States and on both coasts, but demand for this product remains stronger in Canada, thus producing it in the United States makes little sense. This is an aluminum plant in Quebec. The cost of extracting aluminum from ore is primarily driven by electricity costs. Electricity is cheapest in Quebec since the province has an abundance of hydroelectric power. It makes far more sense for Americans to buy aluminum from Quebec than to try to produce it in places with expensive electricity.