VANCOUVER — Reducing Canada’s dependence on trade with the United States market is going to be much easier said than done, based on a new essay released last week by the Fraser Institute.
They released their latest study The Gravity Model and Efforts to Diversify the Markets for Canadian Exports on Thursday.
The study points to trade, common language and common business framework laws, as well as a big population, as among the reasons why there is so much dependence on the American market, compared to countries across the Atlantic and Pacific. Transporting goods to the U.S. \is also seen as less difficult and less costly, even with the current and continuing tariff noise coming from the White House.
This report is one of a series of follow-up studies on the heels of the Fraser Institute’s recent report that was titled Assessing Canada’s Trade Dependence on the U.S., which had focused on the challenges for Canada in moving away from a trading relationship with the U.S.
“The first study just documented the evolution of our trade with the United States, especially over the past quarter century, and showed how deep and persistent our reliance on the American market has been,” said Jock Finlayson, senior fellow at the Fraser Institute and co-author of both that report and this latest study.
“This paper that we released earlier in the week looks at some of the explanations that tries to say why is Canada so heavily focused on the U.S. market, and because there are some insights that economists have developed that can shed light on that. So this one looks at the explanations for Canada's reliance on the U.S. market, and the next essay, which will be out in about a month, looks at other opportunities beyond North America where Canada might be able to expand trade connections.”
This latest particular study uses what is called the Gravity Model, which Finlayson said is a very common model in international trade economics that tries to explain trade between any two countries or any small group of countries.
That was applied to the Canada-U.S. situation in this particular paper, and Finlayson said they found a few things consistent.
“One, which is sort of intuitive and obvious, is that geographic proximity, in other words, the closeness of Canada to the U.S. market, and particularly the closeness of our population centres to the U.S. market, coupled with the sheer size of the American economy, which is 22 percent of all global economic activity, goes a long way to explaining why historically there's been such a strong focus on the U.S. market and the U.S. as a trading partner.”
In particular, Finlayson pointed to physical distance, and that the “cost of shipping goods, whether those are commodity products, or finished consumer goods, or parts and components that are used in manufacturing, the cost of transporting goods still does have an impact on trade, on trade flows.”
“So even though we're right next to the U.S., there's still a cost of shipping goods back and forth across the Canada-U.S. border. But that cost is lower, generally, than the cost of shipping goods to offshore markets. So the proximity of the U.S., leading to lower transportation costs, coupled with the size of the American market, is an important factor explaining why we're so dependent on cross-border trade.”
Other insights, he said, have to do with the impact of a common language, with English widely used on both sides of the Canada and U.S. border.
“It makes it easier to do business when people on both sides of the border speak in a common tongue.”
As well, he points to the “similarities of the business framework laws — in other words, corporate law, business standards, regulatory standards and other things that impinge on the business environment. There's quite a bit of similarity between the U.S. and Canada in those two domains. We certainly have more in common with the U.S. legal system as it applies to business than we do with China or Japan or Germany or France.”
On top of that, Finlayson said trade agreements and the presence of tariffs and non-tariff barriers also play a role in shaping trade flows between countries.
“And with the U.S., at least up until Mr. Trump's return to power, we've had the benefit of tariff-free access to the U.S. market. And, of course, the Americans have the same here, and a reduction over time in non-tariff barriers. So that's also reinforced the north-south tendency of trade to go across the Canada-U.S. border.”
The paper zeroes in on what it will take for Prime Minister Mark Carney and the federal government to reach their goal of reducing dependence on the U.S. and doubling Canada's non-U.S. exports by 2035. Finlayson said a few things will be required for that to happen.
“One, we've got to improve the environment, the business environment in Canada for investment, for developing new projects, for building infrastructure that can get our goods to international markets. And that, I think, is recognized by the Carney government. They're talking a lot about trying to accelerate projects and reduce regulatory delays that have become chronic in Canada —pretty slowed down economic development.”
A second is that if they want to access offshore markets, “we have to realize most of those goods, almost all of them are going to move by vessel, by ship, by maritime trade, seaborne trade,” said Finlayson.
“So we've got to improve our supply chains that get our products to west and east coast ports. We've got to improve the efficiency with which the ports operate by upgrading technology.”
Finlayson noted Canada's major ports do not rank highly on a global basis in terms of their efficiency.
“Montreal, Vancouver and Prince Rupert are all in the bottom quartile of global container handling ports. Halifax actually does quite a bit better. But Halifax is a fairly small port. The biggest ones are – you know, Vancouver is the biggest. And Prince Rupert's important, along with Montreal.”
Then there is the need to pursue trade agreements with offshore markets, with some of the important potential markets ranging from India to China to Japan as well as Europe.
“The thing is, though, we already have trade agreements with a lot of these countries,” said Finlayson.
“As of last year, Canada had 15 trade agreements covering 50 countries other than the United States. And so far, the presence of all those agreements has not dramatically altered our trade flows, which I think reinforces simply the point in our paper that the dependence that we see on the United States in terms of Canada's trade is really structural. It's deeply embedded in geography, in proximity, in industrial structure, and in the very dense production and commercial networks that exist across the Canada-U.S. border that have built up over the last 40 or 50 years.”
He said all of that is going to “make our trade with the U.S. quite sticky in the sense that we're not going to simply pivot away from the United States to other markets, even though some of our political leaders tell sort of a different story on that score.”
Even with substantial investments in new trade infrastructure, the attraction of the United States next door is the favourable aspects of that market.
“Put yourself in the shoes of, I don't know, say a mid-sized company in Saskatchewan with 100 employees, say a manufacturing facility in Saskatoon or Regina, and you decide you want to start tapping global markets for your goods,” said Finlayson.
“It's quite natural that you're going to start with the United States rather than Kazakhstan or Austria or China because it's a lot easier to do business with customers in the United States than with those offshore potential customers. The U.S. is closer. We have a common language, similar business practices. It's easier and cheaper to get your goods into the U.S. market than to ship them offshore.”
He also points to the U.S. population being 10 times bigger than Canada, and over 120 million Americans living within a one day's drive of the Canada-U.S. border.
“Even though there's a lot of Americans who live further south in the country, there's a big market in the northeastern and sort of mid-western and northwestern states in the U.S., so there's all kinds of reasons why trade, I think, will continue to flow very heavily in a north-south direction, even with all the efforts that are being made by policymakers to encourage the development of offshore markets.”
