An Overview of the World’s Largest Trade Relationship Dr. Steven Globerman, Director, Center for International Business, College of Business & Economics, WWU

1. Teaching About the
World’s Largest Trade Relationship
(and Why the Relationship is Important)
Study Canada Summer Institute 2016
Dr. Steven Globerman
Source:http://sbadrinath.files.wordpress.com/2009/03/different26rqcu3.jpg?w=400&h=226
1

2. Some Questions of Interest
• Why is Canada so important to the U.S.?
• What is the nature of bilateral trade and investment?
• Why are trade and investment so beneficial to both
countries?
• What are the “border priorities” of Canada and the
U.S.?
2

3. 1. Canada is our largest trading
partner ….
Barely, if one includes trade in services
with trade in goods
3

4. 1. … and we share the world’s
largest bilateral trading
relationship.
But not many people know this.
4

5. Even the Wall Street Journal
gets it wrong
5

6. 6

7. But they corrected their mistake
7

8. 8

9. 9
Total U.S. Exports Plus Imports of Goods
and Services ($ billions - 2015)
Country Total Percent of Total
Canada 669.4 13.3
China 664.4 13.2
Mexico 592.6 11.8
Japan 272.0 5.4
Germany 236.9 4.7
UK 234.9 4.7
Korea (South) 148.5 3.0
France 114.8 2.3

10. 10
Total U.S. Trade
($ billions - 2015)
Exports Imports
Goods and Services 2,261 2,762
Goods 1,503 2,248

11. 11
Country Shares of Total U.S. Goods Trade
(2015)
China 16.0%
Canada 15.4%
Mexico 14.2%
Japan 5.2%
Germany 4.7%
Korea (South) 3.1%
UK 3.0%

12. China displaced Canada as the
United States’ largest trading
partner in goods in 2015
12

13. 0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Canada China Mexico Japan Germany Korea
(South)
U.K.
16.6%
14.9%
13.5%
5.1%
4.4%
2.9% 2.7%
Country Shares of Total US Goods Trade (2014)
13

14. But this is largely because China
exports so much to the U.S.
14

15. 15
Country Shares of Total U.S. Goods Imports
(2015)
China 21.5%
Canada 13.2%
Mexico 13.2%
Japan 6.2%
Germany 5.6%
Korea (South) 3.2%
UK 2.6%

16. 0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
China Canada Mexico Japan Germany Korea
(South)
U.K.
19.9%
14.7%
12.5%
5.7% 5.3%
3.0%
2.3%
Country Shares of US Goods Imports (2014)
16

17. As recently as 2000, China
accounted for only around 8
percent of U.S. imports of goods
17

18. But Canada is still the largest
market for U.S. exports of goods
18

19. 19
Country Shares of Total U.S. Goods Exports
(2015)
Canada 18.7%
Mexico 15.7%
China 7.7%
Japan 4.2%
Germany 3.3%
Korea (South) 2.9%
UK 3.7%

20. 0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Canada Mexico China Japan Germany U.K. Brazil
19.2%
14.8%
7.6%
4.1%
3.0% 3.3%
2.8%
Country Shares of US Goods Exports (2014)
20

21. 2. Canada is the most
important export destination
for 70% of the 50 states
(but Midwest states are particularly
dependent on trade with Canada)
21

22. Source: http://www.canadainternational.gc.ca/washington/
Canada’s Rank for States’ Exports of Goods
22

23. 23

24. 24

25. 25

26. 26
Time Trend for Canada’s Share of U.S. Trade
% of U.S. Imports % of U.S. Exports
1990 18.4 21.6
1996 19.4 21.9
2000 18.7 22.7
2006 16.1 22.1
2010 14.3 19.3
2014 14.7 19.2
2015 13.2 18.7
Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade
Flows and Their Implications for U.S. Border Infrastructure Investment”

27. 27
Summary
• Canada’s share of U.S. trade has been declining
since 2000
• This largely reflects the growth of Chinese exports to
the U.S. and Mexican exports (to a lesser extent)
• But will China’s exports to U.S. start to level off (or
even decline)?
• Growing number of trade actions against China
• Hostility to state-owned enterprises

28. 28
Top Commodity Exports to Canada (2015)
(U.S. $billions)
Industry 2015 Percent of Total
Exports to Canada
Motor Vehicles and Parts 47.6 16.9
Machinery 42.8 15.3
Electronic Equipment 24.8 8.8
Oil 21.3 7.6
Plastics 12.6 4.5
Medical & Technical
Equipment
8.5 3.0
Aircraft 7.8 2.8
Iron and Steel Products 6.2 2.2
Furniture 5.1 1.8
Paper 4.9 1.7

29. 29
Top Commodity Imports from Canada (2015)
(U.S. $billions)
Industry 2015 Percent of Total
Imports from Canada
Oil 74.8 25.3
Motor Vehicles and Parts 55.7 18.8
Machinery 20.1 6.8
Plastics 10.8 3.6
Wood Products 8.6 2.9
Aircraft 8.4 2.8
Electronic Equipment 7.6 2.6
Aluminum 7.3 2.5
Paper 6.6 2.2
Gems and Precious Metals 6.4 2.1

30. 30
Interesting Observation
• The leading “import industries” are also often leading “export
industries”
Cases in Point
Motor Vehicles and Parts
Mineral fuels
Machinery
Electrical Equipment
Aircraft
Plastics
This identifies the phenomenon of intra-industry trade (IIT) – more
later

31. 31
Types of IIT
Example of Vertical:
Canada exports crude oil to U.S.; U.S. exports refined
petroleum products to Canada
Example of Horizontal:
Canada exports compact cars to U.S.
U.S. exports SUVs to Canada

32. 32
Where Goods Cross the Border
U.S. Port Share of Total Imports
from Canada
1. Detroit, MI 27%
2. Port Huron, MI 19%
3. Buffalo-Niagara Falls, NY 17.5%
4. Champlain-Rouses Point, NY 6.2%
5. Pembina, ND 4.7%
6. International Falls, MN 4.1%
7. Blaine, WA 3.7%
These 7 land ports process 55.5% of all imports from Canada.

33. 33
General Benefits of Trade
1. Specialization by Industry
(Countries specialize in what they do most efficiently
relative to other countries)
2. Specialization by Product
(Companies specialize in a limited number of products
to gain economies of scale)
Trade makes countries wealthier through the phenomenon of
specialization.
The majority of trade is carried out by multinational corporations.
Almost half of this latter trade is intra-firm.
So foreign direct investment is important.

34. 34
Not Everyone Benefits from Increased Trade
• There will be contractions in specific sectors of
the economy with losses of employment
• How important is this phenomenon?

35. 3. Canada is the biggest
source of U.S.
petroleum imports
35

36. 36
U.S. Crude Oil Imports (2015)
(1,000 barrels per day)
Country Volume
Canada 3,223
Saudi Arabia 915
Mexico 761
Venezuela 717
Colombia 413

37. 37
U.S. Exports of Oil to Canada
Are Growing Rapidly
In 2015, U.S. exported around 154.2 million
b/d of crude oil to Canada. The U.S.
exported 48.7 million b/d in 2013.

38. 38
Other “Energy Facts”
• Canada is responsible for almost all U.S. imports
of natural gas
• Canada accounts for all of U.S. imports of
electricity
• Canadian exports account for around 13 percent
of U.S. coal imports

39. “Oil / Tar Sands”
Source:
The Economist 39

40. Oil
Sands
Reserves
• Source:
• www.ubc.ca
40

41. Oil Sands: Surface Digging Method
41

42. • Source: www.guardian.com
42

43. 43
The “Take-Aways”
The oil sands project is a major economic asset for
Canada
Canadian oil companies have large sunk costs in the
project
Environmentalists see the project as a nightmare –
perhaps the single most controversial
economic activity in North America
U.S. Government has blocked building of Keystone
Pipeline

44. Keystone XL
Pipeline
Issue
44

45. 45

46. http://nationalpostcomment.files.wordpress.com/2011/11/keystone-pipeline.jpg?w=620
46

47. 47

48. Source:
The
Economist
48

49. 49

50. 50
The Flies in the Ointment
• Native groups are opposed to oil pipeline
proposals in Canada
• Where they have legal title to their land,
they can block construction unless federal
government is willing to invoke eminent
domain
• China’s growth is slowing. Will they need
natural resources to the extent previously
forecast?

51. Lac Megantic Derailment & Explosion
http://www.ctvnews.ca/polopoly_fs/1.1359962!/httpImage/image.jpg_gen/derivatives/landscape_960/image.jpg
Pipeline Alternatives: Rail
51

52. The Economist’s Solution
• GHG Emissions are an “external cost”
• Internalize the “externality”
• Put a price on carbon emissions
• Use will reflect the full costs
Problem: The externality crosses national boundaries.
Countries must cooperate (not likely given Kyoto accord
experience)
52

53. 4. Canada has a diversified
economic base, but it has
struggled to develop a thriving
high technology sector
53

54. 54
GDP Shares, March 2016
Sector $ CDW (billions) Percentage
Services 1,174.5 70.4
Real Estate 217.8
Finance 117.2
Health Care 113.4
Manufacturing 174.8 10.5
Mining 132.5 7.9
Construction 115.7 6.9
Utilities 37.6 2.3
Primary 33.3 2.0

55. The Modern Canadian Economy:
Technology 55

56. Transportation
http://www.airlinereporter.com/
wp-content/uploads/2012/05/ascrj700.jpg
56

57. 57

58. Adaptation: High-end Clothing
58

59. 59
Canada’s Banking Sector as a Paragon
• Canada avoided the sub-prime mortgage-related economic
meltdown that hit the U.S. in 2008
• Many credit Canada’s banking regulations as the reason that
Canada avoided the financial sector bankruptcies and mortgage
default experiences of the U.S.
• Also, Canada did not experience the severe recession from
2008-2009 that the U.S. experienced
• However, Canada’s overall productivity performance continues to
lag that of the U.S.
• Since 1984, business sector productivity in Canada has
grown at half the U.S. rate

60. 5. Canada-U.S. trade is
often about trading
“apples for apples” and
“making things together”
(Recall intra-industry trade)
60

61. Making Things Together:
Specialization, Scale and
“Apples for Apples” Trade
Ford Edge:
Oakville, Ontario. Canada cbc.ca 61

62. North American Specialization
Ford Escape:
Kansas City, MO
62

63. 63

64. SeaTac Airport Shuttle Trains:
•Source: http://www.visitingdc.com/images/seatac-train.jpg
64

65. SeaTac Airport Shuttle Trains:
Made in PA by a Canadian Company
•Source: http://farm4.static.flickr.com/3379/3198460812_79dd9093c2.jpg
65

66. Foreign Direct Investment
Seatac shuttle trains illustrate important phenomena:
1. There are many Canadian companies
operating affiliates in the U.S. and likewise for
U.S. companies;
2. A significant share of trade between the two
countries is intra-firm trade.
66

67. 6. The Canadian government
has done a lot to improve
business conditions in Canada
67

68. Some Measures Taken by
Federal Government
68
• Lowered corporate tax rates
• Improved incentives for innovation
• Reduced government debt/GDP ratio
•Privatized Crown Corporations
•Free trade agreements
• NAFTA
•European Union
•Bilateral

69. 69

70. 70
* The 2014 ranking is the same as 2013.

71. …Canada’s economy has
performed well under free trade,
but productivity has not improved
as expected
71

72. Unemployment Rates
72
• Canada had lower unemployment rate than
the U.S. from 2008-2013
• May 2015 unemployment rates:
Canada = 7.1%
U.S. = 4.4%

73. High Ratio of Household Debt to
GDP is a Potential Problem for
Canada
73
• Largely related to mortgage
borrowing given relatively high
housing prices to income in major
Canadian cities.

74. 74

75. High Ratio of Household Debt is
Seen as a Big Risk Factor for
Canadian Economy
75
• Bank of Canada is concerned about
a housing “bubble”
• Required down-payments on house
purchases have been increased (up
to 20%)

76. Canada Has a More Equal Distribution
of Income Than the U.S.
76
• Tax-transfer system is more
“progressive”
• Larger share of government funding
for services such as health care;
education

77. Top 1% Share of Income
77
U.S. (2014) = 21.2%
Canada (2013) = 10.3%

78. 7. Foreign Direct Investment
78

79. 79
Stocks of Foreign Direct Investment (2014)
Outward
(Canada)
Country Millions CDN $ Percentage of Total
U.S. 349,965 42
Other 478,847 58
Inward
(Canada)
Country Millions CDN $ Percentage of Total
U.S. 361,372 49
Other 370,891 51

80. By contrast, Canada accounted for slightly
less than 10 percent of the stock of foreign
direct investment in the U.S. in 2014.
U.S. direct investment in Canada
accounted for around 8 percent of the
stock of U.S. outward foreign direct
investment in 2013.
80

81. Canadian banks have recently been
large investors in the U.S.
e.g. In 2015, the Royal Bank of
Canada purchased the largest
private wealth management bank
in L.A. (lots of movie stars’
money).
81

82. 8. Canada has a long history
of protecting its economy from
U.S. competition
82

83. The Tariff
“Wall”
“Greedy”
American
Wolves
Happy
Canadian
Farmers
And
Manufacturers
Sir
John A.
Macdonald
83

84. Source: Hart, M. A Trading Nation

85. Source: Hart, M. A Trading Nation

86. 86
Some Important Elements of
Protection Still Exist
• Very high tariffs on dairy and poultry
• Canadian content rules for broadcasters
• Foreign investment restrictions in a number
of sectors including banking,
telecommunications and transportation
•North American Content Rules

87. 9. Canadians and Americans
have different “border
priorities”
87

88. Canadian Priorities
88
U.S. Priorities
• Security (terrorism)
• No “undue” border procedures
• Relatively quick inspection of commercial
goods
• Relatively lenient visa permitting
• Border infrastructure (second crossing for
Detroit-Windsor)

89. 89

90. 90
Priorities Away From
the Border
Canada
• Protection of Canadian culture
• “Buy-American” programs
• Keystone pipeline
• Anti-dumping
U.S.
• Intellectual Property Protection
• Canada’s Defense Expenditures
• Supply management programs

91. 10. Canada-U.S. Trade:
What Will the Future Bring?
91

92. 70%
72%
74%
76%
78%
80%
82%
84%
86%
88%
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
USA Share of Canada's Exports
922015 = 76.7%

93. 93
The Canadian Dilemma
• U.S. is a very important market for Canadian
exports
• But Canada has been “losing share” in U.S. market
• Should Canada try to diversify its markets, e.g.
emphasize growing its trade with Asia?
• Should Canada “double-down” and make even
greater efforts to increase trade with the U.S.?

94. 94

95. Successes or Failures?
Source: http://www.thestar.com/opinion/editorialopinion/article/1029360--the-cost-of-freer-trade95

96. 96
Proposals to Expedite
Commercial Border Crossings
• Perimeter security
•Harmonize health and safety
regulations/reciprocal recognition
of each country’s regulations
•Common external tariff
•Pre-clearance arrangements (agreed to)

97. 97
Pie-in-the-Sky
• Common currency
•Economic union
•Political union

98. 98
Overall Conclusions
• Bilateral economic relationship remains of major
importance
• But direction of relationship is unclear
• Separate negotiations for free trade agreement
with EU
• Presidential candidates’ rhetoric about “unfair”
trade agreements
• TPP seems unlikely to be implemented
• Hostility to fossil fuels