Trade Partners Use Canada For Access To The American Market

April 1st, 2018 | C. Wang
canada being used

I remember taking trips down to Minot, North Dakota back in the 1980’s. Travelling from Regina to Minot took about five hours and it always led to fun weekends consisting of shopping, movies and hotel-pool swimming. Back then the United States felt more foreign than it does today. In the 70’s and early 80’s we had a federal government lead by Pierre Trudeau, a communist-loving Liberal. Saskatchewan was a communist-loving NDP province, full of brutalist architecture and crown corporations, and this only added to the Soviet flavour of pre-free trade Canada. Seeing the United States, mostly through romanticized, Hollywoodized mediums like television and film, offered a glimpse into a freer, more prosperous, more colourful reality. Visiting a small North Dakota city like Minot took on a magical vibe that I’m sure seems ridiculous today. There were loads of products on the shelves that we had seen in movies, but were unavailable in Canada. Visiting stores like K-Mart and Wal-Mart seemed unreal compared to the Woolcos and Eatons back home. We would pack up the trunk of our car with Pringles and Coca-Cola in aluminium cans and drive back to Canada wondering why we didn’t have the same products with the same prices back home.

Then NAFTA happened.

Oh sure, trade with the U.S. took place under GATT and when Brian Mulroney got us the original Free Trade Agreement in 1989 the ball really started rolling, but it was NAFTA that functioned as the biggest game changer. Since NAFTA, Canada has tripled exports to the United States ($110 billion in 1993 - $346 billion in 2013). Foreign direct investment into Canada has quintupled in the same amount of time ($70 billion in 1993 - $368 billion in 2013). Canada’s GDP is bolstered by exports to the United States to the tune of 20% of our total GDP. Ontario alone attributes 49% of their GDP to trade with the United States. Alberta... 31%. Quebec... 23%.

Enough with the numbers. The fact is that NAFTA has been very good to Canada. We have the prosperity and standard of living that we’re accustomed to today, because of our proximity to the U.S. market. The biggest downside is that this has made us nationally lazy and incubated from real world necessities... like being competitive and productive and ambitious. The very traits that lead to success are traits that we’ve traded for being America’s kept pet, but in fairness, before free trade we weren’t exactly the most dynamic country. Free-trade simply allowed us to maximize our geographic reality and capitalize on our neighbour’s economic engine. We traded sovereignty for material comfort and now that Trump is changing the game, we’re slowly realizing that our bubble is about to burst.

You wouldn’t know this from reading mainstream media articles outside of the Financial Post. Canadians have these ridiculous notions that we need to “get tough with the Americans” and fight fire with fire... which is absurd. Canada is a country that can’t build a pipeline, with a Prime Minister wearing rubber ducky socks to a Davos summit. We don’t have fire to fight with. We need the United States in order to maintain our prosperity and security... they don’t need us.

Sure we can provide raw materials and a handful of integrated supply chain manufacturing elements at a lower cost, but the reality is... if Trump effectively “tariff bans” our stuff, America will adjust and carry on with their own stuff. It might cost a bit more, but the cost stays inside their borders and life goes on. For the Canadian businesses that rely on American customers, they’re in trouble. They can’t make up the loss with a sparsely-populated underdeveloped Canadian home base.

Maybe we can diversify our trading partners and thus not be so reliant on U.S. trade!

Yes, that’s a great idea... and it’s been suggested for 150 years! Harper tried to push this, just like every Canadian Prime Minister before him and he signed a lot of free trade deals. The problem is that loosening up trade with Chile or Ukraine doesn’t really create enough trade to replace the gigantic pay-off that proximity to the U.S. offers. Even the big recent trade deals like the TPP and CETA aren’t as helpful as we’d like to believe due to our distance from those markets and our lack of competitive advantage. We do more trade with the United States alone then we do with ALL OTHER COUNTRIES COMBINED. We can’t replace this level of wealth by diversifying trade.

Another interesting take on this subject comes from this blog post regarding foreign investment.

Summary: The reason that foreign investment is taking a nosedive is because many countries used Canada and Mexico as proxies for access to the U.S. market. The idea being that they could ship auto parts (for example) to Canada or Mexico from places like China and then have them used in the assembly process in Canada or Mexico and then conclusively shipped to the United States. In other words, foreign direct investment into Canada was nothing more than a stopover measure for access to the U.S. market. NAFTA made this access possible. Once Trump took office and began sabre-rattling about NAFTA, the rest of the world gave up on that strategy.

This also explains Justin Trudeau’s embarrassing reception in China and India recently. Yes, he fumbled and made an embarrassment of himself as usual, but the dismissive attitude of those two world powers was indicative of something deeper. Canada doesn’t matter to China and India anymore, because our access to the United States isn’t guaranteed. We’re just a frozen vacant country halfway around the world now... worth no more than the sum of our natural resources. Listening to Justin preach about gender and climate change? No thanks.

So where does this leave us?

It leaves us in deep trouble. The globalist approach of streamlining the world into a supranational corporation and shrugging off the collateral damage (deplorables in red states) as a result, is coming to an end... or at least being put on hold. The United States under Trump will still be a trading nation, but the focus will be on “America First” and the new collateral damage will be Canada.

How bad will it be?

As I mentioned earlier in this piece, the mainstream media seems to be shrugging it off with bank reports doing deep dives into numbers and suggesting it’s all really no big deal. It think they’re missing the bigger picture. The psychology of international investment will change. Without NAFTA and Canada’s access to the U.S. market, anyone investing in Canada will be doing it primarily for Canada’s market...and nobody cares about Canada. For Americans specifically, they’ll forgo any exchange rate advantage for fear of dealing with borders and red tape and tariffs etc.etc. and if they expand and grow, they’ll do it inside of the United States exclusively.

Canada is in for generational, transformative change. We’ve got some of the worst political leadership this country has ever seen... not only at the federal level, but also at the provincial and municipal levels. We’ve got a rapidly aging population with dubious retirement savings. We’ve got record levels of personal, corporate and government debt. We’ve got a housing bubble...

And now we’re possibly losing NAFTA.

Buckle your seatbelts.