INTERNATIONAL: 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 States:

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 other countries.

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 inter-provincial trade.
•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 electrical/electronic equipment.
•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 imports.
•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 edge.

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 relationship.

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 cutting.

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 improved markedly.
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 another.
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 Canada.
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 technological world.
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 than Canada.

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.

Competitiveness:

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 Canada.

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 -1998.

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 and debts.

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 and management

public policy -Pro-active public policy (labor strong actor)

Organized Unions:

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:

•Productivity
•Innovativeness
•Skills
•Environment
•Health

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 United States

Year

Canada

United States

 

Membership (thousands)

Percentage of Non-agricultural Paid Workers

Membership (thousands)

Percentage of Non-agricultural Paid Workers

1946

832

24.2

12,254

30.4

1951

1029

30.2

15,139

31.7

1956

1352

33.6

16,446

31.4

1961

1447

30.6

15,401

28.5

1966

1736

30.7

18,922

29.6

1971

2231

32.4

20,711

29.1

1976

3042

36.9

22,153

27.9

1981

3487

36.7

20,647

22.6

1986

3730

37.7

16,975

17.1

1991

4068

36.3

16,568

15.3

1996

4033

33.9

16,269

14.5

1997

4074

34.1

16,110

14.1

1998

3938

32.5

16,211

13.9

1999

4010

32.3

16,447

13.9

Source: Kumr, 1993, pp. 12-13; HRDC and BLS (annual)