Canadas Economy and Trade

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CanadasEconomy and Trade
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Outline

• Basic facts about Canada
• Commercial policy (history)
• NAFTA
• Recent trade data (1988-2001)
• Trade theory

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A primer on Canada

• Colors
• Red, White, and (thats it!)
• Symbols
• Maple Leaf, Beaver
• Coins
• Loonie, Toonie
• Anthem
• O Canada!
• Sport
• Land of Hockey

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A better primer on Canada

• Area 10 million sq. km (6.2 million sq. miles).
  2nd largest.
  
• Population 30 million
• Government
• Representative, parliamentary democracy.
• Confederation of 12 provinces (each with
  Parliament)
  
• Legislative ? Executive (Cabinet from
  Majority/Plurality Party)
  
• Prime Minister (provincialgovernor,
  federalpresident)
  
• Languages English French
• Federal jurisdictions
• Trade, commerce, defense, telecoms, immigration,
  navigation shipping, fisheries, banking
  currency, criminal law, civil rights freedoms,
  etc.
• Provincial jurisdictions

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Population Density, 1996
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First Language English (1996)
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First Language French (1996)
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Comparison to United States

• 1/10th size of population GDP.
• Income per-capita lower but higher human
  development index (U.N.)
  
• Trade is relatively more important.
• Size Role of Government
• Education, Health Care, Unemployment Insurance,
  Social Security, Transfers.
  
• More government ? more taxes.
• Provinces are somewhat like States.

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Canadas Exports and Importsof Goods and
Services as percentage of GDP
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Among G-7 countries, the ratio of Canadas
exports of goods and services as percent of GDP
in 2000 was the highest.
45.3
11.1
33.3
11.2
30.1
33.4
29.2
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History of Commercial Policy

• 1840-1914
• Search for partners
• Nationalism on the rise
• Pragmatic protectionism
• 1914-1945
• (British) Preferential system (trade blocks)
• Post-1945
• Towards regional free-trade

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In the beginning

• 1867 Birth of Canada (BNAA).
• Article 121 prohibits inter-provincial barriers,
  and gives federal government authority to impose
  tariffs.
  
• Tries to exercise its powers of taxation and
  import duties, but it must contend with Britain,
  up until end of WWII.
  

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Canadian Economy

• Initially sustained by natural resources, now
  also manufacturing and services.
  
• Diversified by region
• Manufacturing ? Quebec, Ontario
• Fishing ? Maritimes
• Wheat, Coal, ? Prairies
• Forest, Mining ? B.C.
• Provinces must be consulted on trade policy, and
  interests differ.

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An ambiguous relationship

• Ups and downs of protectionist sentiment
  (Conservatives vs. Liberals).
  
• Compromise between satisfying trading partner and
  securing access to foreign markets.
  
• GATT/WTO have allowed (somewhat) market
  diversification, but regional trade is a magnet
  (limits of policy).

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Fear and Opportunity

• Canada relies on foreign markets to sustain
  growth and high income. This goes towards
  openness and free-trade.
  
• It fears relying too much on a single partner
  (Britain then, U.S. today). Cultural and economic
  nationalism goes towards (partial)
  protectionism.
• Reality is that regional economic integration
  occurs despite periods of protectionism on both
  sides and attempts at diversification.

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Towards regional FTA

• Reciprocity Treaties
• 1854-66
• Many failed attempts (e.g. Laurier 1911)
• 1935
• 1965 Auto Pact.
• 1970s-80s Nationalism, Protectionism.
• 1989 U.S.- Canada FTA.
• 1994 NAFTA ( Mexico).

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Levels of economic integration

• Free-Trade Agreement
• Establishes unimpeded exchange of goods and
  services between trading partners regardless of
  national borders (e.g. NAFTA).
  
• Customs Union
• FTA Common external policy (e.g. Mercosur).
• Common Market
• Customs Union Labor mobility Policy
  coordination (e.g. EU).
  

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NAFTA Highlights

• Established in 1994.
• 360 million consumers.
• Combined GDP of 6 trillion.
• Progressive (over 5-10 years) elimination of
  tariffs and NTBs.
  
• Principle of national treatment
  (non-discrimination).
  
• Limited access to public procurements.
• Partial liberalization of foreign investment.
• Protection for some sectors (agriculture, autos,
  energy, textiles, ).

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Impact on Canada

• Any regional FTA involves
• Trade diversion
• Trade creation
• Diversion seems negligible and creation is
  readily observable.
  
• In last 10 years, exports to (and imports from)
  U.S. have increased 1.5 fold!
  
• Trefler estimates that ¼ of these increases are
  directly attributable to NAFTA.
  

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Canadas Trade of Goods and Services
billion
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Canadas Current Account Balance
Percent
Billion
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Stock of Foreign Direct Investment in Canada
billion
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Distribution of US Merchandise Imports
Percent of Total
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Distribution of US Merchandise Exports
Percent of Total
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US Merchandise Trade Balance
US Billion
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Destination of Canadas merchandise exports
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Origin of Canadas merchandise imports
Geographical groupings as defined by Statistics
Canada.
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Trade TheoryComparative Advantage

• Canada is relatively land abundant (natural
  resources)
  
• ? natural comparative advantage in land
  intensive industries.
  
• Accounts for large surplus in energy and forestry
  products.
  
• Within agriculture, large net imports of fruits
  and vegetables, and large net exports of live
  animals.
  
• In industrial sector, large surplus in metals and
  ores.
  
• Acquired comparative advantages
  (learning-by-doing economies of scale) in some
  manufacturing, services, and hi-tech industries.
  
• Anomaly? Large trade in auto products.
• Auto Pact (1965)
• Intra-industry trade (New Trade Theory)

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Trade in services relative to total tradein
goods and services.
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Canada-US Exchange rate
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Geographic distribution of trade

• Over the last year, trade with the United States
  has been adversely affected by terrorist attacks
  and by the slowdown in economic growth in North
  America.
• In consequence, Canadas trade has been
  reoriented somewhat away from the United States
  to the rest of the world.
  
• Overall, trade with the United States still
  dominates the picture, averaging C1.85 billion
  per day in 2001, down from 1.91 billion in 2000.
  This is the largest bilateral trade relationship
  in the world!