Canadian economic integration with the united states
Canadian Economic Integration with the United States
The economic relationship between Canada and the US is currently in a state of flux. For some time now, the U.S. has been experiencing one of the longest and most intense recessions since the great depression. Canada has always had a deep economic relationship with the United States of America, and due to this association, it too has started experiencing the same economic woes that are facing the US. To combat the recession, the president of the United States of America, Barrack Obama, has put forward measures that are geared towards reviving the economic status of America. However, the president is expected to act in accordance to his constituents and other prominent stakeholders on Capitol Hill. The net effect of this is that the president may bring into effect measures favorable to America but unfavorable to Canada (Fry, 2009). Therefore, to avoid the potential for extensive negative impact on the economy of Canada, there should be less economic integration between Canada and America. This paper looks at the economic dependence of Canada on America and its effects.
Over the last decade, Canada's economy has done very well and has resulted in the country recording one of the most significant increases of economic growth within the G7 group of nations. Due to this, the Canadian government and its citizens have benefited greatly from this continued economic surplus during this period. For example, due to economic growth, nation's real estate was noted to have drastically increased. The other very important success that Canada experienced is that of declining unemployment rates. This meant that with the increase in economic status experienced in Canada, more citizens were working. The prices of goods and products in Canada increased and the TSE index consistently rose. As a result of this economic success, the period was defined by a high standard of living for most Canadian and US citizens. For instance, the US real estate values became highest in mid 2006. At the same time, the Dow Jones industrial average recorded an all time high closing of 14,164 on October 9, 2007. Indeed, during this period, Canada found it quite favorable to direct a significant portion of its economic capacity and products to the US.
According to many analysts, the crash in the US mortgage industry due to the sub prime fiasco was the beginning of the current recession. As a result, most Americans experienced huge financial losses leading many to forfeit their houses at substandard prices. In most cases, US citizens had their possessions tied to three main sources; being jobs, house equity, and savings. Presently, approximately thirteen million American citizens are unemployed, and the unemployment rate is expected to increase to rates that have not been seen since 1981/82 when a similar recession occurred. The overall value of real estate has dropped over an average of twenty percent since 2006. This is experienced mainly in states like Florida and California. Other states that have felt the effects include Nevada and Arizona (Fry, 2009). Thus if Canada continues to depend on America, her economic status is likely to decrease drastically due to the effects of the economic downturn.
At the end of 2008, it was estimated that one homeowner in five was ‘under water'. This is meant to imply that the homeowner was due to pay more on his mortgage than the value of the house. Such conditions demonstrate the weakened condition of the American economy, thereby resulting in further negative economic effects on its citizens. Other clear indications that depict the deteriorating U.S. economy include the examples of the near collapse of General Motors, and Citigroup, once rated among the world's most prominent financial institutions. Therefore, it is imperative for Canada to consider other ways of sustaining its economic status other than almost sole reliance on the US (Beaulieu, 2007). Continued dependency on the US will lead to a further decline in Canada's economic growth.
Historically, Canada has always been one of the US's biggest trading partners. The Canadian/US agreement known as North American Free Trade Agreement (NAFTA) led to a further increase in the level of commerce conducted between the US and Canada. NAFTA has further solidified the economic integration between Canada and the U.S. and consequently the interdependence between the two nations. As a result, the two nations took positions whereby Canada invested more in the production of goods while relying on America for its exports, thereby making the U.S. its main export market, and demonstrating that their economic relationship is clearly “asymmetrical” (Mahant and Mount, 1989, 288). According to Beaulieu, (2007), “Since 1980, the volume of Canadian international trade has continued to increase rapidly and has become even more specialized in its destination market partner, i.e. increasingly specialized in trade with the US” (pg. 101). By specializing in production and having a ready US market, Canada recorded an increased economic growth, along with higher incomes and increased productivity. Nevertheless, a small specialized market base is a risk to any nation, and Canada has been noted as over-relying on the U.S. whose demand on its goods is dwindling especially due to the American economic crisis (Harris & University of Calgary, 2009). The way forward for Canada is to come up with policies of trade and investment that will enable it to develop its market worldwide.
There are several risks involved in cases where a country depends on one state in a asymmetric market. In this light, Canada happens to have a bilateral business with the US, where Canada seems to indulge more in the American market without focusing on other nations. This is to its disadvantage in that Canada's economic growth depends on the economic status of the U.S. Therefore, should the economic growth of America reduce, then Canada's will correspondingly be affected. This is the current state of affairs and the American government has resolved to make policies and trade guidelines to improve its nation's economic situation. Despite good relations, the US will put its own interests first when it comes to economic matters. This invariably may not be in Canada's best interests, thereby increasing the need for reducing its dependency on America. Therefore, Canada needs to broaden its target market and seek opportunities internationally by taking advantage of “Globalization”(Perlin, 2009). In lieu of this, the Bank of Canada's Governor has indicated that it is imperative for this nation to focus on other markets beyond North America (Beaulieu, 2007).
The dependency by Canada on America is characterized by both economic as well as political integration. This raises the question of whether Canada can attest to being truly independent of American political and economic influences. Indeed, most “critics point out that adoption of “deep integration” implies a significant shift in political power and loss of sovereignty for Canada (Perlin, Ch 10, pg 10, 2009)”. In addition, by depending on America for trade relations, Canada exposes itself to uncertainties that result from the latest decision by America to make trade policy a political matter by incorporating it with its political goals. The US has further asserted that in order for any country to have negotiations with America over free trade agreements, the two countries must cooperate in matters pertaining to foreign and security policies(Castel, 1997).
Proponents note that even if Canada is dependent on the US, this dependency can be managed. The claim that Canada is deeply dependent on America is somewhat incorrect and it should be observed, that the advantages that result from this relation outweigh the contended negative effects of the dependency. There is also the argument that by depending on America as its main export market, Canada has put all eggs in one basket. This might be a misleading, as Canadian exporters have also started to test the worldwide market. The act of integration with North American interests, has provided these organizations with a larger stake in the international business economy. Moreover, investigating Canada's trade patterns and comparing them with those of other countries shows that Canada, despite its deep integration with America, has recorded more benefits than detriments from the relationship. Nevertheless, with continued dependency on the US, Canada risks becoming a loser whenever the American market posts a decline (Haggart, 2001).
With the specialization in the production of goods and their sale to America, Canada expects growth that might be high or low depending on the demand of the US markets. However, Canada would experience maximized benefits were it to strategize and sell its products to the highest paying market. Therefore, the idea is to level the income over some time. To achieve this, Canada needs to expand its export markets instead of relying heavily on a sole market. For instance, the demand for Canada's products in that specific market may decrease and this may affect the economy of Canada in an adverse manner (Fox, 1994). Therefore, the remedy to the dilemma facing Canada is to diversify the export markets to avoid the risks of losing demand for its exports.
It is clear that Canada and America have common interests toward fighting terrorism. This was particularly evident after the September 11 attacks on America. The interests directed at harmonizing border-crossing, show that Canada is determined to maintain accessibility to the United States of America. The success of Canada depends on exports and imports to and from America. Therefore, delays in the transfer of individuals and goods moving across the border leads to more losses on the Canadian side because of the high economic costs recorded in the process. Therefore, there is a clear demand for Canada to make relevant policies and avoid the potentially negative results that may result from deep economic integration with America (Proulx, 1990). Once America is affected by any political or economic occurrence, Canada also feels the consequences.
The current state of over-reliance on the US as an export market was noted as being due to economic policies and treaties established in the 1980s. International opposition to NAFTA, claimed that Canada possessed biased interests in the US; it was noted that Canada engaged in sending most of its products that amounted to seventy percent of the country's exports to the US. Leading an dispute from other countries that the manner in which Canada depended on America was not good, both for reasons related to economic status and politics. Nations supporting the NAFTA ideals came to Canada's defence, claiming that this nation was backed into a corner, and could only support the American market for its own good. Nevertheless, Canada needs to review its strategies because times have changed and due to new policies such as globalization; older policies may not work well for Canada in the future (Jovanović, 1998).
Considering the facts related to its dependence of one primary export market, it has been noted that Canada needs to focus on programs of export diversification. However, it is likely that the programs might become inefficient, due to the extensive nature of the economic integration. Any effective trade policy should be that which is intended at decreasing the costs of carrying out business transactions across the Canada-US border as well as developing an international system of trading through multilateral as well as regional trade and investment agreements. Nevertheless, even with such changes, the need for Canada to reduce the extent to which it depends on America for export market cannot be overlooked (Cardarelli & Kose, 2004).
The US is currently experiencing economic challenges, although its economic future is expected to improve. However, some problems are classified as structural and are likely to affect the economic growth in an adverse manner for years. For instance, the US government is yet to commence paying on its huge debt. Thus, this will have implications on the interest rates, rates of inflation and future worth of the US dollar. The US depends on the investors from foreign countries such as China and Japan to purchase half of treasury debt demands. There is also a lot of government debt meant for auctioning off within some years to come. This poses a question of whether there will be other investors ready to buy the debt instruments and whether they will have higher expectations concerning rates of return upon their investments. The printing of money to facilitate economic development is likely to affect the value of the dollar as per the investors' demands. In addition, the usefulness of American dollar as international currency and a reserve will be questioned.
Economists have been working on the development of economic decoupling. The decoupling theory is meant to ensure that other nations continue experiencing economic growth despite the recession of the US, which is considered as a hegemonic nation both militarily and economically. However, the theory has been discredited “… because of globalization patterns, the major role that the US continues to play in the international economy and the toxic effects of transnational trade in credit derivatives” (Fry, 2009, p. 35). In addition, the unpleasant impacts of transnational trade in credit efficiency have also contributed to the demystification of the theory. It is important to note that Canada has been included in decoupling exercises. Which support as some countries have asserted that high product prices and the signing of new agreements with states outside North America would allow Canada to expand its reach further than North American borders (McKinney & Gardner, 2008).
It is clear that no any state in the world depends on a second state for its economic growth in the same way that Canada depends on America. In the G7 group of nations, Germany is the only country with a higher ratio of export-to-GDP while Canada exports approximately eighty percent of its products to one market, America. Moreover, the recent surpluses noted by Canada, which is the widest measure of growth, are associated with America. For instance, in 2008, Canada had a C$11.2 billion surplus in its current account. Indeed, according to Fry (2009), only a few years back “Canada was leading the G7 group of nations in economic growth and Ottawa was enjoying a long series of government surpluses” (p. 34). However, clear scrutiny establishes that its current account surplus with America was C$38.3 billion whereas its transactions with other countries were in the negative realms of C$27.1 billion. It is clear that the association between Canada and the US has become stronger to an extent that most of the Canadian provinces export more goods to the United States than they supply within Canada. This deep dependency in America is unhealthy, especially since Americans have started to cut down on their rate of consumption and associated habits. Thus, Canada has started to feel the loss as exports to the U.S. decline.
In summary, 90 percent Americans regard Canada as America's best friend. Only twenty percent of exports from Canada go to other countries, whereas the larger portion, goes to American markets. Moreover, eighty percent of the numbers of visitors that go to Canada are Americans. Furthermore, one million jobs are provided by America foreign direct investment to Canadians. The number of central budget surpluses for the last ten years amount to ten. The number of the America's central surpluses within the same period was two. The quantity of gross central debt in America amounted to eleven trillion an increase of 100% since the 2000. Finally, twenty percent of American house owners paying more for their homes than the houses are actually worth. Therefore, to avoid the negative impact that deep economic integration between Canada and America may lead to, especially with the current American recession, Canada should diversify and expand its global markets thereby avoiding uncertainties and economic trouble.