2015 STUDY CANADA presentation by Steven Globerman, Director, Center for International Business, College of Business and Economics, Western Washington University

1. Teaching About the
World’s Largest Trade Relationship
(and Why the Relationship is Important)
Study Canada Summer Institute 2015
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.?
• Why are trade and investment so beneficial to both
countries?
• What is the nature of bilateral trade and investment?
• What are the “border priorities” of Canada and the
U.S.?
2

3. 1. Canada is our largest trading
partner ….
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. 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)
9

10. 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)
10

11. 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)
11

12. 2. Canada is the most
important export destination
for 70% of the 50 states
12

13. Source: http://www.canadainternational.gc.ca/washington/
Canada’s Rank for States’ Exports of Goods
13

14. 14

15. 15

16. 16

17. Source: Kasoff, Drennen, & Storer Chapter
17

18. 18
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
Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade
Flows and Their Implications for U.S. Border Infrastructure Investment”

19. 19
Top Commodity Imports from Canada (2013)
(U.S. $millions)
HTS 2013 Percent of Total
Imports from
Canada
87 Motor vehicles and parts 55,704 16.8
27 Mineral fuels 109,000 32.9
84 Mechanical machinery 19,752 6.0
48 Paper products 6,790 2.0
85 Electrical machinery 7,881 2.4
98 Special 10,176 3.1
44 Wood and products 7,884 2.4
Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade
Flows and Their Implications for U.S. Border Infrastructure Investment”

20. 20
Top Commodity Exports to Canada (2013)
(U.S. $millions)
HTS 2013 Percent of Total
Exports to Canada
87 Motor vehicles and parts 51,702 17.2
84 Mechanical machinery 45,298 15.1
85 Electrical machinery 26,774 8.9
98 Special 8,890 3.0
90 Instruments 9,373 3.1
39 Plastics 13,047 4.4
27 Mineral fuels 24,658 8.2
73 Iron and steel 7,879 2.6
Source: Globerman and Storer (2015), “An Assessment of Bilateral Trade
Flows and Their Implications for U.S. Border Infrastructure Investment”

21. 21
Interesting Observation
• The leading “import industries” are also often leading “export
industries”
Cases in Point
Motor vehicles and parts
Mineral fuels
Mechanical machinery
Electrical machinery
This identifies the phenomenon of intra-industry trade (IIT) – more
later

22. 22
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

23. 23
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.

24. 24
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.

25. 25
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?

26. 3. Canada is the biggest
source of U.S.
petroleum imports
26

27. 27
Country Share of U.S. Petroleum Imports
(2014)
Country Percentage
Canada 36.7
Saudi Arabia 12.6
Mexico 9.1
Venezuela 8.6
Russia 3.6
Source: U.S. Energy Information Administration

28. 28
U.S. Exports of Oil to Canada
Are Growing Rapidly
In April 2014, U.S. exported around 263,000 b/d of
crude oil to Canada. That was 2.5 times as much as
in April 2012.
In the same month, Canada exported around 2.7
million b/d to U.S.

29. 29
Other “Energy Facts”
• Canada is responsible for almost all U.S. imports
of natural gas
• Canada accounts for all imports of U.S. electricity
• Canadian exports account for around 13 percent
of U.S. coal imports

30. “Oil / Tar Sands”
Source:
The Economist 30

31. Oil
Sands
Reserves
• Source:
• www.ubc.ca
31

32. Oil Sands: Surface Digging Method
32

33. • Source: www.guardian.com
33

34. 34
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

35. Keystone XL
Pipeline
Issue
35

36. 36

37. Source: www.latimes.com
37

38. http://nationalpostcomment.files.wordpress.com/2011/11/keystone-pipeline.jpg?w=620
38

39. 39

40. Source:
The
Economist
40

41. 41

42. 42
The Fly 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

43. Lac Megantic Derailment & Explosion
http://www.ctvnews.ca/polopoly_fs/1.1359962!/httpImage/image.jpg_gen/derivatives/landscape_960/image.jpg
Pipeline Alternatives: Rail
43

44. 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)
44

45. 4. Canada has a diversified
economic base, but it has
struggled to develop a thriving
high technology sector
45

46. GDP Shares, April 2012
46

47. The Modern Canadian Economy:
Technology 47

48. Transportation
http://www.airlinereporter.com/
wp-content/uploads/2012/05/ascrj700.jpg
48

49. 49

50. Adaptation: High-end Clothing
50

51. 51
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

52. 5. Canada-U.S. trade is
often about trading
“apples for apples” and
“making things together”
52

53. Making Things Together:
Specialization, Scale and
“Apples for Apples” Trade
Ford Edge:
Oakville, Ontario. Canada cbc.ca 53

54. North American Specialization
Ford Escape:
Kansas City, MO
54

55. 55

56. SeaTac Airport Shuttle Trains:
•Source: http://www.visitingdc.com/images/seatac-train.jpg
56

57. SeaTac Airport Shuttle Trains:
Made in PA by a Canadian Company
•Source: http://farm4.static.flickr.com/3379/3198460812_79dd9093c2.jpg
57

58. 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.
58

59. 6. The Canadian government
has done a lot to improve
business conditions in Canada
59

60. Some Measures Taken by
Federal Government
60
• Lowered corporate tax rates
• Improved incentives for innovation
• Reduced government debt/GDP ratio
•Privatized Crown Corporations
•Free trade agreements
• NAFTA
•European Union
•Bilateral

61. 61

62. 62

63. …Canada’s economy has
performed well under free trade
63

64. 2
4
6
8
10
12
14
1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Unemployment Rate (%)
Canada
United States
64

65. High Ratio of Household Debt to
GDP is a Potential Problem for
Canada
65
• Largely related to mortgage
borrowing given relatively high
housing prices to income in major
Canadian cities.

66. 66

67. High Ratio of Household Debt is
Seen as a Big Risk Factor for
Canadian Economy
67
• Bank of Canada is concerned about
a housing “bubble”
• Required down-payments on house
purchases have been increased

68. 68

69. Canada Has a More Equal Distribution
of Income Than the U.S.
69
• Tax-transfer system is more
“progressive”
• Larger share of government funding
for services such as health care;
education

70. •Top 1% Share in 2007
•18.3%
•13.8%
70

71. 7. Trade isn’t just goods:
Trade in services and foreign
investment
71

72. 72

73. http://www.findfamilyfun.com/birch-bay-washington.htm
73

74. 74

75. 75

76. •http://www.bloomberg.com/video/91845099/ 76

77. •The Economist, U.S. Edition, May 23, 200977

78. Source: http://hockeygonewild.wordpress.com/2010/03/09/
Identify the symbols and logos:
78

79. http://www.flickr.com/photos/achimh/4368189976/sizes/l/in/photostream/79

80. 8. Canada had a long history
of protecting its economy from
U.S. competition
80

81. The Tariff
“Wall”
“Greedy”
American
Wolves
Happy
Canadian
Farmers
And
Manufacturers
Sir
John A.
Macdonald
81

82. Source: Hart, M. A Trading Nation

83. Source: Hart, M. A Trading Nation

84. 84
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

85. •http://news.nationalpost.com
•/2012/03/31/tempest-in-a-
•yogourt-cup-u-s-based-
•chobani-seen-as-threat-to-
•local-makers/
85

86. 9. Canadians and Americans
have different “border
priorities”
86

87. Canadian Priorities
87
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)

88. •Canada: A Source of
“Vulnerabilities?”
Source: Bellingham Herald
• Source: ABC news • Source: International Border Commission
88

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
92

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
• Expand border infrastructure (2nd bridge
connecting Detroit and Windsor)
• Expand membership in Nexus

97. http://www.dol.wa.gov/images/DLsamples-EDLLg.jpg 97

98. 98
Pie-in-the-Sky
• Common currency
•Economic union
•Political union