Rethinking Foreign Policy

Canada needs to stop playing defence on the economy and aspire to shape American policy towards us.

Canada's relationship with the United States is the most important of all bilateral ties simply because more than 50 cents of every dollar in Canadian pockets is derived from our trade and investment. It is no longer true that this relationship is essentially in good shape and that we only need to worry about occasional irritants. I do not mean to predict imminent calamity, but we are hurting from a thousand cuts.

Canadian-American relations are caught in the strong currents of American security and economic nationalism. Canadian policy is tossed to and fro in this storm and our interests are in constant peril. I do not think that the Canadian public is aware of how gloomy things really are. Dealing with both security and economic nationalism is a type of “double whammy” – a double blow as a result of an evil influence. In this case, the hexes are the new security threats and the unraveling of free commercial exchange.

The first blow came with the attacks by al-Qaeda on American soil. As a result, the last nine years of Canadian-American relations have been dominated by Canada deflecting with little success the negative impact of the 9/11 attacks on our shared border and deeply integrated economies. Security costs, border waiting times, costs to truckers and traders for programs to facilitate secure and rapid passage are all up. Canada's manufacturing sector, which until recently was the leading export sector, has been structurally weakened by the thickening of the border. There is a serious threat of both foreign and Canadian investment going south. The integrated supply chain created in the automotive sector is under great stress, exacerbated by the sharp economic downturn in 2008 and the rise of the Canadian dollar.

The second blow is at root caused by the failure of both countries to integrate beyond the Canada-U.S. Free Trade Agreement and NAFTA. The bare-bones free trade regime between us allows America to return to economic nationalism. The extent of this sentiment goes beyond the current crisis over the Buy America provision or the Country of Origin Labeling in food products. It goes to the very heart of the commercial relationship the two countries should have built over the last 20 years. The trade distortion value of different product standards and regulations, of customs processing, and of border security neutralize a lot of the gains we made 20 years ago in getting rid of most tariffs.

Energy and environmental regulations are threatening to make things worse. These regulations threaten Canada's second largest export category: energy products. Because the United States clearly depends on Canadian oil and gas exports, Canadians assume that the U.S. leadership will treat this sector as a special strategic resource. However, we cannot expect the U.S. Congress to think strategically about Canadian oil because local interests are likely to trump continental energy policies. For example, the new energy bill passed in the House forbids the U.S. federal government from buying fuel produced from Canadian oil sands.

It is only natural for Canadian policy makers to look to other countries as a way of making up the losses. Of course free trade with as many countries as possible is good as it gives Canadians more choice at lower cost and stimulates economic activity. Ottawa is now negotiating a trade agreement with the European Union and is actively looking for more opportunities in Asia. As multilateral trade talks are stagnant, Ottawa has begun to pursue more bilateral free trade arrangements. But these will not easily solve our trade impasse with the United States. The estimated yearly gains of our accord with Europe will only be worth one week of trade with America. Direct investment by Canadians in Asia and Asians in Canada is still tiny. Even if trade grows, keep in mind that Canada has generally run large trade surpluses with the United States, but with the rest of the world we run substantial deficits. For our value-added and manufacturing sectors to be competitive in the world we need the economies of scale that comes from access to the big U.S. consumer market.

Are we prepared to drastically deepen trade and security ties with the United States? Can we have a single economic market and still have enough Canadian political independence? If so, we must stop merely coping and emerge from our defensive and reactive position. Canadians must aspire to shape American policy towards Canada. According to an old quip, diplomacy is the art of letting the other guy have your way. Are we ready?