Why Open Trade Matters For North America's Prosperity: The Canadian Perspective

By: Dale Eisler, Consul General of Canada Issue: Global Trade Section: Building Bridges

NAFTA at fifteen: The Canadian Perspective

“Trade has brought vast benefits to most Americans. Jobs in exporting companies, on average, pay considerably higher wages than jobs in companies that sell only within the U.S.”

– U.S. President Bill Clinton

If economic history has taught us anything, it’s that open borders and free trade create economic opportunity, growth and higher standards of living. They promote efficient specialization and foster economies of scale. The result is increased production and profits through new export opportunities, which also creates higher-paying jobs. Simply put, free trade is essential to prosperity.

The other thing we have learned from economic history is that in difficult economic times, during periods of recession and shrinking economic growth, we sometimes forget the lessons of the past. When times get tough, we often retreat inward and begin taking protectionist measures to shield us from “foreign” competition. By putting up walls around our economy, we foolishly think the road back to prosperity and economic growth is by not trading - that is buying and selling - with others beyond our borders. That somehow, if we just buy and sell from ourselves, we’ll be able to return to a strong and growing economy. You might call it the “taking in our own laundry” approach to economic growth.

The problem with that approach is not only does it not work, it can actually cause a stagnant or shrinking economy to deteriorate even further. And it can easily lead others to take similar protectionist measures in what amounts to a slippery slope of beggar-thy-neighbor policies. As markets shrink, opportunities vanish and jobs disappear. In other words, protectionism makes the economic problems worse, not better.

The fact is that free and open trade provides access to larger markets, which keep us competitive and productive - essential ingredients of a dynamic and growing economy.

Think of it in terms of a local economy. For example, if in Metro Denver there were protectionist regulations that prevented a company in Denver from selling its product to someone in Lakewood, or vice-versa, we’d all agree that would be crazy. Then if Lakewood companies could only sell to Lakewood residents or other Lakewood-based companies, and the same was true in Aurora, imagine how economic growth would be stunted and jobs lost. Well the same thing between nations would produce the same negative economic results, only on a much larger scale. Why Open Trade Matters To find evidence that free trade is good for national economies, you have to look no further than the North American Free Trade Agreement (NAFTA). The facts show that since the implementation of NAFTA more than 15 years ago, the United States, Canada and Mexico have all benefited from increased trade and commerce. In fact, from 1993 to 2008, trade among these three nations has more than tripled—rising from $297 billion to $964 billion. And business investment in the United States rose by 117 percent compared to a 45 percent increase during the previous 15 years. In addition, trade between Canada and the United States alone has grown dramatically since NAFTA. In 2008 this bilateral trading relationship - the largest between any two countries in the world - reached $696 billion. That’s more than $1.9 billion in goods and services that crossed our shared border every day, well in excess of $1.3 million dollars per minute. That translates into 7.1 million U.S. jobs dependent on trade with Canada.

Yet despite the overwhelming evidence supporting free trade, our tendency to guard what’s close to home during periods of hardship has already emerged with the current economic recession. The recent economic stimulus bill before Congress included a “Buy American” provision that many feared could lead to a series of protectionist measures and thus further weaken the world economy.

Ultimately, the U.S. stimulus legislation was amended to include assurances that any “Buy American” provision would be consistent with international trade obligations. But those provisions do not apply to state and local governments, which means protectionist measures have emerged at the sub-national level. Faced with this reality as the United States and Canada deal with the economic slowdown, it is important to remind ourselves continually that protectionist reactions will ultimately only hurt our joint efforts to get North America’s economy back on track.

But don’t take my word for it however. The key facts and figures speak for themselves. They illustrate why open trade among neighbors matters so much to our shared economic prosperity.

U.S. Trade: The Big Picture

The chart to the left from the Bureau of Economic Analysis shows what’s happened to U.S. trade since 1992, with the inception of NAFTA in 1994. It shows the growth (in billions of dollars) of exports and imports, and it also shows the U.S. trade deficit. As you may note, the trade deficit has been growing during this period, particularly since about 1998. But it’s important to put this in its full context. This is not U.S. trade within NAFTA, it is total U.S. trade with the world. That’s an important distinction, because in assessing the effects of NAFTA on the United States, one must not confuse NAFTA with what might be other trade patterns the United States has with other countries, such as China.

U.S. Trade Benefits under NAFTA

Why Open Trade Matters1 Now, having put U.S. trade in its global context - particularly as it relates to bilateral trade with China - let’s turn the focus to NAFTA and its impact on the United States. The graph above, from the International Trade Administration, U.S. Department of Commerce, shows growth in Issue 5 Why Open Trade Matters for North Americas Prosperity The Canadian Perspective graph002 exports, in other words growth in the “stuff” the United States sells to other countries. As you can see by the graph, the United States’ biggest customers are its NAFTA partners - Canada and Mexico. By a factor of roughly 15 percent, the United States exports more to Canada and Mexico than it does to the rest of the world.

Looking at the U.S.-Canada trade relationship, this pie chart shows that Canada is the largest export market for the United States. According to the World Trade Atlas, in 2008 more than 20 percent of U.S. exports headed north of the border. Nothing comes close to Canada as a destination for U.S. goods and services. In fact, the United States sells more to Canada than U.K., Germany, Japan and China combined.

Turning to imports, until last year the United States was also the largest market for Canadian goods and services. According to the World Trade Atlas, in 2008 nearly 16 percent of all U.S. imports came from Canada, falling slightly behind China. Prior to 2007, the United States imported more from Canada than it did from China. One-third of those imports were in the energy and mineral resource sectors, and today Canada continues to be the United States’ single biggest energy supplier, providing more oil to the United States than Saudi Arabia and Kuwait combined, accounting for 22 percent of total U.S. oil imports. Why Open Trade Matters2 Now let’s get a view from the boardroom. In a Deloitte Research survey of 321 executives from leading North American manufacturing companies, which was published in 2008, 49 percent said that NAFTA has had a positive impact on their business and only 10 percent a negative impact. The remainder of the respondents said NAFTA had a neutral impact.

NAFTA: More Important than Ever

So by making an analysis of NAFTA based on evidence, I hope you will draw the same conclusion as I do. During these difficult economic times protectionist thinking and actions will harm, not help, North America’s economic recovery. Thus, in order for our continent to maintain its competitive edge in an increasingly complex and interconnected global marketplace, a strong, modern and flexible NAFTA is required.

Trade is as old as humanity… (it) allows everyone to play to his or her own strengths while benefiting from the productive skills of the whole community.

“Trade is as old as humanity… (it) allows everyone to play to his or her own strengths while benefiting from the productive skills of the whole community.” – U.S. Federal Reserve Chairman Ben Bernanke

The Government of Canada has made the development of a more competitive North American platform the cornerstone of its commerce strategy. We must adopt a forward-looking NAFTA approach for the next decade that builds on our collective strengths, synergies and our close ties - an approach which stimulates continental trade flows, and accelerates the removal of trade barriers. This is especially important considering that Canada and the United States share a deeply integrated marketplace and supply chains, where we not only buy and sell things to each other, but we also make things together too.

NAFTA has helped lay a strong foundation for North America’s economy as a whole, and has increased global competitiveness for all three of its partners—the United States, Canada and Mexico. So, let’s continue to work together to ensure this remarkable success story keeps moving forward on the right track towards greater prosperity for all North Americans.

Dale Eisler is Consul General of Canada for Colorado, Montana, Utah and Wyoming.

In September 2004, the Government of Canada opened a Consulate General office in Denver as part of its continuing efforts to increase Canada’s presence and to expand bilateral trade and economic relations in the United States. This office is part of a network of Canadian Government representation throughout the United States, including the Canadian Embassy in Washington D.C., 13 Consulates General and seven Consulate offices.

While the Canadian Embassy is responsible for overall bilateral relations between our two countries, the mission of each Consulate is to build stronger bilateral ties within a specific U.S. region. The Consulate General of Canada in Denver represents the Government of Canada in the four-state Rocky Mountain region of Colorado, Montana, Utah and Wyoming. Areas of operation include Trade and Investment; Political, Economic Relations and Public Affairs; and Management and Consular Services. For more information, visit the website at www.denver.gc.ca or call (303) 626-0640.