Canada Scores Big NAFTA Wins

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posted November 8, 2002

Even as the controversy rages over softwood lumber, the book can be closed on whether Canada's great trade deals with the United States have benefited Canada.

Those deals the Free Trade Agreement of the late 1980s and the North American Free Trade Agreement (NAFTA), which replaced FTA in 1994 have made the United States the engine of Canada's economy. Yet, new threats loom on the horizon.

Many Canadians believe Canada, an economic pipsqueak next to the world's most pumped up economy, can't win any competition with the United States. They fear the United States will use its great power to tip the playing field to its advantage.

Yet, not only has the game been fairly played, Canada has come out the winner by all measures. The raw numbers make that absolutely clear.

Last year, Canadian exports to the United States were worth $350 billion, representing roughly one third of Canada's economic activity. Export jobs tend to be among the highest paying in the economy. Export sectors are also typically the most technologically advanced, helping to renew the Canadian economy with productivity improving technology.

But, there is an even more remarkable number Canada's trade surplus with the United States. For the past two years, Canada has had an annual US surplus of nearly $100 billion. That means Canada's trade surplus with the United States, alone, counts for almost 10 per cent of Canada's economic activity.

Such numbers deflate the idea that the United States uses its immense power to bend the rules. If the United States were willing to play dirty, it would never allow any nation to gain such a surplus.

In fact, a US protectionist might argue that simply eliminating Canada's trade surplus could recharge the temporarily weakened US economy, still the world's most dynamic but in rough waters now.

Although Congress has shown disappointing protectionist tendencies, there have been no attacks on the core fabric of NAFTA, even though it has so clearly favoured Canada.

Canada was explicitly exempted from recent US trade action on steel. Congress's decision to boost US agricultural subsidies is bad news for Canadian farmers but the action was mostly aimed at the European Union's even larger agricultural subsidies.

That leaves US softwood lumber action. Canadians should understand the United States arguably has point. Canadian governments may be undercharging for the right to harvest trees on Crown land, and that would constitute a subsidy. Although Canadians are repeatedly told Canada wins its case before international tribunals, whether NAFTA or World Trade Organization tribunals, recent decisions have been ambiguous.

The murkiness of the case and the domestic power of US softwood interests have led to never-ending problems, but in other disputes Canada has been a consistent winner.

In two-thirds of the trade cases Canada has appealed to a NAFTA panel, Canada has either won outright or achieved a reduction of US duties. Mexico has done about as well. That's not the only good news from Canada's and Mexico's perspective. Since NAFTA, the number of US trade actions leveled at its North American partners has declined relative to the number of actions aimed at Europe.

But, this is not a gift. Canadian businesses have to stay sharp to remain ahead of the curve. Ted Carmichael, chief Canadian economist at J.P. Morgan's Toronto office, has warned that Canada's dominant position in US trade is being eroded by newly industrializing nations.

Canada's share of US imports had risen to 19.5 per cent by the late 1990s but has now fallen back to 18.5 per cent, the level of the early 1990s. That's partially due to factors that may be temporary, like the softwood lumber dispute, but it's still a warning sign.

Canadians like to blame the United States whenever possible, but the economic danger Canada faces in the US market comes not from Congress but from the growing economic power of nations like Mexico and China.

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