Canada in a global economy
Impacts and implications of growing economic
integration with the United States
By NAVROZ SURANI
June 25 - July 01, 2001
With an area of 10 million square kilometres (over
3.8 million square miles), Canada is the second largest country in the
world, but given its population of only about 30 million, it is one of
the least densely populated. In 1993, Canada had less than three
persons per square kilometres as compared to about twenty-eight
persons in the US and forty-seven in Mexico. It has been argued that
Canadians, more than most people, tend to define the world and their
place in it in terms of geography. In part, this may reflect the
feeling of space and unlimited resources that result from the low
population density. It may also stem from the very uneven population
distribution occasioned by Canada's northern climate: some 80 per cent
of Canadians are estimated to live within 320 kilometres (200 miles)
of the southern border with the US. This, in turn, generates the
strong feelings felt by a small population living immediately adjacent
to a very large and powerful one.
The geography of Canada tends to push commercial
trade into north-south flows within North America. Movement is easier
by sea than land along the Atlantic and Pacific coasts, and
unrestricted movement east and west is inhabited by natural barriers,
the barren, Canadian Shield as it dips down to the Great Lakes
separating heavily populated southern Ontario from the western
prairies, and two great mountain chains, the Laurentian-Appalachian
chain in the East and the Rockies in the West (Clement et al. 1999).
Canada and the United States have much in common.
They are bound together by a common continental heritage, analogous
economic, political, and social systems, interdependent financial and
product markets, and a very similar labor market institution (Kumar,
1993.) There is no question that the two economies are now more
entangled than they have ever been — partly because of lower trade
barriers, but also because of the way technology is changing the
processes of production and decision making.
Globalization, which has been a dominant force of
the last decade is shaping a new era of interactions among nations,
economies, and people. It is increasing the contacts between people
across national boundaries in the economy, technology, in culture and
in governments. It has removed many of the forms of protection used by
countries to pursue independent economic, social, and cultural
policies, thus making competitiveness on a global scale more
imperative. It has forced the nations to pursue stronger international
rules and common goals multilaterally, since the economies are now
greatly integrated and dependent on each other.
Canada's relationship with the US has impacted
almost all aspects of economic, political, and social life in Canada.
As economic development and technology remove the barriers between
countries, and as globalization becomes more intense, these trends are
more magnified in Canada-US context.
It is an established fact that Canada's national
identity is defined in part by its strong economic cultural and
political relationship with the United States. According to Maxwell
(2001), there is a clear evidence of growing pressure to be more like
Americans. For example,
•Well-to-do Canadians wish to adopt the American
style of social policy (private health insurance) so that they can buy
the quality of care they want at the time they need it.
•Canadians already show a strong preference for American films,
television shows, magazines, etc.
•Business leaders have been lobbying for tax reductions to match or
approach American levels to make investing and working in Canada more
profitable and to slow the brain drain.
However, this relationship has been characterized
by divisive tensions between believers in the economic benefits of
closer commercial relations with the US and those who have feared that
free trade would "Americanize" Canada (Hoberg, 2000).
According to Hoberg, economic integration is
connected with both cultural and political integration, one affects
the other. This aspect has caused considerable debate and has given
rise to concerns about their relationships. The intense political
conflicts surrounding free trade in Canada have been driven largely by
different beliefs about the relationships between the economic sphere
and the political and cultural sphere. Nationalists have argued that
greater economic integration will inevitably lead to the destruction
of Canada as a cultural and political entity, whereas supporters of
free trade have dismissed this view, arguing instead that there is in
reality little connection between economic sphere and the political
and cultural sphere.
The purpose of this article is to study the
significance and impact of American and Canadian integration and its
impact and implications on the Canadian economy. More specifically,
the article addresses the following key questions.
a) What is the nature of economic integration
between Canada and US and what are its key dimensions?
b) What is its impact on the Canadian economy, i.e,. How this
integration has benefited Canada?
c) What are the main concerns/issues relating to this widespread
economic integration between the two countries?
d) How can Canada maximize the benefits of this integration; is there
an untapped opportunity for Canada?
Canada's Economic Integration with the United
Integration can be conceptualized as a process
moving along a continuum from "fundamentally distinct and
un-related" at one end to "fully integrated" at the
opposite end. The phenomena of integration is perhaps best measured
and understood in the economic sphere. At one end would be the
unlikely world of economic autarky, where there are no exchanges
across borders. At the other end, fully integrated end of the
continuum, there would be no barriers at all to the exchange of goods,
services, or capital across borders (Hoberg).
Clearly, the economies of Canada and the US are
highly integrated. The two countries have created a relationship of
unparalleled synergy and cooperation. Both the countries have reached
out, each in its own way, to help shape our economic environment: The
United States as a superpower and now in the words of ex president
Bill Clinton as an "indispensable nation", Canada has played
its own role as a creative and honest broker in the international
system (Chretien 1998). This conclusion is best illustrated by
studying some key economic dimensions.
There has been a dramatic increase in trade flows
between the two countries over the last several years. The US is the
largest trade partner for Canada. Between 1989 and 1998, the share of
Canada's trade with the US reached almost 80% of its total trade.
Canada trades more than four times as much with the US than with any
Around 80% of the total exports go to the US ($300
billion). Similarly, 73% of Canada's imports now come from the US,
which is almost 30% of Canada's total GDP. The signing of Free Trade
Agreement (FTA) and North American Free Trade Agreement (NAFTA) has
even helped in closer trading relationships between the two countries.
Canada's economic links with the US are strong and
getting stronger. They are developing quickly, not only in trade and
investment, but as well as in many new dimensions such as in
cross-border R&D spending and collaboration. In many ways, these
new links are in response to the forces of rapid globalization, the
information revolution, and the transition by all countries towards
more knowledge-based activities. A comparison of the Gross Domestic
Product between the two countries shows that Canada had a higher
growth than US but it has disappeared in the past decade (Figure 1).
The unemployment rates during 1964-1973 were relatively close, however
between 1984-1993 the Canadian rate was 9.6% versus 6.4% for the
United States (Figure 2). The inflation rate during mid 1970s and
early 1980s was higher and in two digits. Inflation has declined
sharply since then (Figure 3).
A comparison of the federal government budget
deficit for the two countries shows appreciably poor performance in
1980s and 1990s (Figure 4). The Canadian -American exchange was mostly
pegged in early 1960s (Canadian dollar was pegged at US $0.925). The
Canadian dollar appreciated in the early 1970s but than fell
considerably in value after 1976 (Figure 5). In terms of the trade
balance, Canada has generally been in positive balance but had a
deficit on the entire current account. As compared the US has shown
persistent deficits on both accounts between the two countries
(Clement 1999). Other key dimensions showing the deep economic
integration between the two countries are shown as follows:
•Between 1989-1998, Canada's total trade with the
US (exports plus imports) rose a spectacular 140%.
•Canada's trade with the US is growing much faster than
•Today, $297 billion or 81% of all Canadian exports go to the US.
This accounts for over 33.5% of Canada's GDP.
•73% of all Canadian imports come from the US.
•The dollar value of Canada's exports to the US is rising faster
than it's imports. As a result, Canada has a growing trade surplus.
•The US economy has displayed strong economic performance and growth
during the 1990s. The Canadian dollar has depreciated from around .90
cents US in 1992 to below .70 cents US in 1998 and 1999.
•Since the signing of Free Trade Agreement in 1989, virtually all
tariff and many non-tariff barriers to trade in goods between the two
countries have been eliminated.
•The signing of NAFTA in 1994 has helped this process and has
resulted in a closer trading relationship between the two partners.
•Canada's major exports to the US are: Natural resources,
resource-based products, transportation equipment, and
•Commercial services, which include many industries essential to an
increasingly knowledge-based economy (example, telecommunications,
finance, engineering and business services) constitute a large part of
Canada's services exports and imports to the US.
•Canada's export of services grew about 31% slower than merchandise
products, and about 80% slower than US exports.
•Close to half of Canada's trade with the US involves intra-firm
activities. In 1996, slightly more than half of Canada's intra-firm
trade involved transportation equipment's, primarily automobile
•The US is Canada's dominant source of foreign capital —
accounting for more than 55% of the foreign capital invested in 1998,
of which about one quarter is in the form of US direct investment.
•The integration of the North American economy has given rise to an
emerging R and D infrastructure. Companies on either side of the
border draw on the resources of both countries to aid in product and
process innovation. This gives each economy an important international
Impact of integration on the Canadian economy:
The economic relationship bears eloquent testimony
to the benefits of integration. Canada -US trade is now at twice the
level of eight years ago. More than one billion dollar worth of goods
and services cross the common border every single day which is quite
remarkable and unparalleled level of exchange. Canada and US are the
largest trading partners and have the world's largest trade
Canada is by far the largest customer of US goods .
It buys from US more than all fifteen members of the European Union
combined. The benefits of openness to the global economy go well
beyond increased exports. Canada's domestic economic performance has
shown a good improvement, and the economy has done considerably well
in key indicators like inflation, unemployment, education, and deficit
The Canadian government has regained the ability to
address the priorities of Canadians while living within its means. It
has made considerable investment young people, health and communities.
Canada has been able to abide by its value of caring and compassion,
with an insistence that there be an equitable sharing of the benefits
of economic growth.
The integration has been instrumental in
transforming Canada into a pluralistic society. It has enabled
Canadian businesses to adopt modern management practices focus on
research and development invests in new technology and move towards
high performance workplace practices. Some key aspects of Canada's
economic performance are as follows.
a) Debt and deficit reduction: Canada has turned
the corner on deficits and continues to make improvements to its
overall debt levels. Provincial financial performances have also
b) Employment creation: Canada's rate of creating employment is the
highest among the major developed countries.
c) Long-term unemployment: Canada's ability to break the cycle of
long-term unemployment is excellent. It has also been able to cut the
unemployment rate significantly since 1999, although the level of
unemployment still remains high.
d) High graduation rates: Canada is a top performer in graduating
students from both high school and university.
e) Connectedness: Canada is a top performer in its ability to use
information and communication technologies to interact with one
f) Gross domestic product (GDP) per capita: Canada, like most of the
countries, has fallen farther behind the US on this key quality of
life indicator. It has not been able to keep up with the phenomenal
pace of per capita income growth generated south of the border.
g) Productivity: Canada is now considered a poor productivity
performer. The record has deteriorated over the years.
h) Innovativeness: Innovation remains a weak spot
in Canada's future outlook. It persistently trail other countries in
the amount of resources it commits to R& D, and it is not just a
matter of losing ground to the major research powerhouses of the US
and Japan. Clearly, this fact should serve as a wake-up call to
i) Skills: Too many of Canada's adult population
— about 40 percent — have inadequate literacy skills, and there is
not enough commitment to lifelong learning to correct and enhance
these skills. In addition, Canada's younger people fare poorly on
international tests of mathematical skills and knowledge, factors
central to Canada's ability to compete in an increasingly
j) Environment: Canada ranks at or near the bottom
of the pack on environmental performance. The Nordic countries and
Germany are top performers. Only Australia ranks consistently lower
k) Health: Despite the fact that Canada has one of
the highest life expectancies in the world, it still ranks below
Japan, Australia, and Sweden. Low mortality rates from cancer and
cardiovascular disease in Japan shows how much improvement Canada can
make in Canada.
As a result of this integration many industries
operate on a continental basis. They demand a removal of restrictions
on any type of trade barrier and as such the policies that impact
trade and competitiveness have come under close review. In addition,
the pressure towards harmonization, or at least mutual recognition of
standards and policies is evident in all sectors of the economy.
Labor Market Implications:
In many ways, the most intense concerns about the
impact of economic integration have been about labor markets. Several
studies have been undertaken to study the impact of free trade on rise
and fall in total jobs and its impact on wage equality.
A recent study by Daniel Trafler provides some
estimates of the effect of free trade during the 1989- 1996 period.
Trefler estimates that the free trade agreement reduced jobs in
manufacturing by 4% overall and by 18% in most affected industries. In
another study Beaulieu finds that through 1996, the FTA had a small
negative effect on manufacturing employment in Canada integration have
been about the labor markets. Given the complexity of the economic
forces at work, it is difficult to disentangle the impacts of free
trade from other phenomena such as tighter monetary policy,
technological change, and business cycle.
Brain-Drain (Is Canada loosing its bright and
brightest to the US?):
One of the most difficult consequences of
increasing integration has been the prospect of brain drain, the loss
of highly skilled workers as a result of a combination of lower taxes,
higher wages, greater opportunity and easier immigration rules. There
is fear that due to integration Canada is loosing its best and
brightest and many have pressured the policy makers to introduce more
innovative taxation policies to stop the brain drain. A report issued
by C.D. Howe institute claims that this phenomena cost Canada $7
billion between 1982 and 1996 in lost subsidies to higher education
and an additional $12 billion from 1989 to 1996 in churning costs to
replace better trained and paid emigrants to the us with immigrants to
One of the most significant consequences of
increasing economic integration with the US has been the prospect of
"Brain Drain"; the loss of highly skilled workers as a
result of lower taxes, higher wages, greater opportunity, and easy
immigration rules in the US.
Although there is a wide-spread perception that
large and growing number of Canadians (best and brightest) have been
migrating to the US and that it has had a large effect on the supply
of skilled workers in key sector of the Canadian economy. However,
according to a survey conducted by Heliwell (Policy Options, 2000),
this perception is not supported by numbers. According to his study,
over the last 30 years, there has been a steady continuation of
century-long downward trend in the number of Canadian-born residents
in the United States. The 1990s movement of educated Canadians to the
US is surprisingly small in spite of lower employment rates in the US
as well as lower tax rates. the study shows that the number of 1990s
migrants to the US who were still there in early 1998 has averaged
12000 per year, of whom 8000 are employed and about half have
university degrees. The movements have been significant nursing, it,
and engineering fields.
The study also predicts that the flow may be
reduced in future as the relative supply situation becomes more
similar in the two countries, driven by some combination of reduced
fiscal pressures in Canada, reduced excess demand in the United States
and a forthcoming retirement bulge in Canada. Helliwell concludes in
his study "it would be a mistake to use the brain drain as a spur
of changes to taxes and expenditures that do not otherwise pass the
tests of economic and political logic."
In a recent study undertaken by Dr. Ross Fennie of
Queens university the same issue confirms the earlier findings. The
study shows that the rates of workers migration to us are at
historical low level and moving to US does not appear to have gained
any special attractions for Canadians of late.
The implication of this finding is to alert the
policy makers the frequently talked about Tax cut would be an
extremely blunt instrument to prevent the brain drain. Policy makers
should devise a uniquely Canadian approach to brain drain rather than
simply following the American lead in a race to the bottom in terms of
taxes and of necessity public spending.
Macro Economic Impacts.
In the context of Macroeconomics comparison with
the US, Canada has not generally performed well. Although, Canadian
inflation rate has been successively less than US rate over the last
few years. Its per capita income both in terms of absolute amounts and
growth have has lagged that of the US. Canada has also experienced
higher interest rates than US however the situation reversed in 1997
Canada's productivity performance has not been
poorer than the US performance. According Hoberg, Canada's
productivity growth in the manufacturing sector alone has been worse
but multifactor productivity growth has been comparable. Canada is not
catching up with US as some other countries in this aspect.
Over the years Canada has made three key policy
choices: the decision by the bank of Canada to adopt a zero inflation
target, the decision to pursue free trade agreement, the fiscal policy
choice by federal and provincial government to rein in their deficits
Implications of Integration on IR Front:
Despite closeness and great linkages between
institutions, there is a great variation between labor movements and
organizations between the two countries. The IR systems have taken
different parts under similar environmental pressures.
The divergence is particularly inexplicable in the
context of highly interdependent product and financial markets,
similar economic structures and close institutional ties between the
two countries (Kumar). There is a "continental" divide
between the goals, priorities, and strategies of the two labor
movements, in collective bargaining approaches and outcomes, and in
the public policy framework.
Both the countries have taken different paths under
similar environmental conditions.
American Path Canadian Path
-Weak Unionism -Strong Unionism
-Management domination -Adherence to an adversarial culture
-Market-oriented, non-interventionist -Partnership between labor
public policy -Pro-active public policy (labor strong actor)
One would expect both countries' trade unions to
follow similar trajectories. After all, the collective labor movement
closely traced that in the USA. Just as the Canadian labor law was
modeled after American Wager Act. In fact, labor relations with the
country are a domain of dramatic divergence.
Canadian vs. US Union Membership:
The contrasting fortunes of trade unions in Canada
and the US over the last two decades have sparked considerable
research comparing the circumstances of the two labor movements (Kumar
1993; Riddell 1993). The main explanation of this division appears
related to supply site rather than demand factors.
The growth of temp workers:
One major area of uncertainty is the apparent
dramatic increase in temporary workers, a new status created under FTA
and NAFTA the number of highly skilled workers temp workers going to
us is higher than the number of permanent emigrants there is a
possibility that once in the US these temps may decide to settle
permanently there. This could be a serious issue requiring deep policy
initiatives and discussions.
How Can Canada Maximize The Opportunity:
Canada is moving towards a knowledge-based economy.
Canada's 21st century Economic Vision as stated by the Prime Minister
is "to enhance the well-being of all Canadians. Without growth we
cannot realize this purpose. A strong economy is the indispensable
foundation to achieve the Canadian vision "Canada's economic
strategy is based on the premise that the purpose of economic growth .
The blueprint recognizes that the sequencing of government action is
crucial. The first priority had to be to achieve fiscal health and
begin to create the climate for sustained growth. On this foundation,
through continued fiscal responsibility and strategic investment in
people and technology, the government can help accelerate transition
to the knowledge economy and ensure that all Canadians have the
opportunity to contribute to and benefit from economic growth."
To achieve this vision, in the period of
globalization and information revolution, Canadian businesses must
continuously be prepared to undertake promising new areas of economic
activities that depend on large market access. According to Porter,
"given a more open global trade, firms in Canada need to develop
global strategies, Competing globally means competing beyond North
America" US is however the key since it is the largest, richest,
and most dynamic and technologically advanced market with an abundance
of opportunities. In today's changing world, the US will either be
leading, or at minimum strongly influencing, these changes. Canada, as
a much smaller player in the global community, and with its close ties
with the US, will need to be prepared to respond quickly to events
beyond it's immediate control. In the new global environment,
knowledge and flexibility will be the most valuable commodities.
Maintaining our close linkages to the US will be to
our advantage, but the apparent shortcuts offered by riding on the US
coattails will need to be balanced by careful consideration of where
our goals and objectives may differ from those of the US. Increasing
integration with the US in many sectors should not be mistaken for a
goal in itself, but as a means of improving our internal capabilities
and as a stepping-stone to positioning ourselves in the global market.
The real point of comparing Canada's performance
with that of other advanced countries is to see the kinds of results
that are possible and what road it must take to achieve them. In
searching for effective economic and social policies to enhance our
quality of life, it is clear to us that we must find ways to improve
in the following key areas:
If we do not succeed in improving our performance
in these critical areas, the choices available to us in terms of
social and economic programs will be restricted. Our ability to chart
our own course of social and economic development will be severely
tested if we continue to slip farther behind the United States. The
encouraging news is that as it responds to a different and more
demanding economic environment, Canada is able to draw upon many
strengths. These include a talented and relatively youthful
population, a nucleus of internationally successful firms, and most
importantly the opportunities afforded by the proximity to the
enormous United States market. These strengths if fully explored
should allow Canada to achieve its economic goals, promote individual
freedom and enable the Canadian to achieve the unique "Canadian
Way" in the 21st century.
Union membership and density in Canada and the
Non-agricultural Paid Workers
of Non-agricultural Paid Workers
Source: Kumr, 1993, pp. 12-13; HRDC and BLS (annual)