Canada's Catch-22: The State of Canada-US Relations in 2014

Economic and political relations between Canada and the United States, our most important foreign relationship, have worsened since the Fraser Institute's previous report on the state of Canada-US relations, Skating on Thin Ice (Moens, 2010). Canadian merchandise exports to the United States have weakened in relative terms. At the same time, there is not enough Canadian export diversification to other destinations to make up this relative loss.

American and Canadian regulators are talking about rationalization, mutual recognition, and harmonization regarding certain policy areas, manufacturing product standards, and border security regulations. Incremental progress is being made, mainly by pilot projects, and it appears that border costs have plateaued. Capping costs is good, but the goal remains to reduce border costs. Border crossing data, though incomplete, suggests that Americans are travelling far less to Canada and that the commercial costs of crossing the border remain too high.

While Canadians are selling relatively less to the US than they buy from the US, they are also not selling substantially more to the rest of the world. In other words, Canada?s record for diversifying its trade from the US is modest over the last five years. The conclusion of the Comprehensive Economic and Trade Agreement (CETA) with the European Union offers a small trade effect for Canada and also promises an important advance in lowering certain regulatory barriers to trade.

The Ryan-Murray budget accord will offer another two years of modest budget cuts in the USA, and will likely improve policy stability and thus foster GDP growth. Canada?s opportunities to benefit from a stronger US economy in 2014/15 exist, but Canadians cannot count on any policy governance from the bilateral relationship to facilitate such market growth. The Catch-22 of Canada?s ongoing trade dependency with the USA and its modest success in diversification can only be lessened by strategic and systematic attention from the US Executive branch. In such a strategy, a two-pronged approach would emerge. It involves both lowering North American barriers to trade and negotiating freer trade with the rest of the world as a North American economic actor.