According to Statistics Canada, this nation’s merchandise trade position has been fluctuating between mildly positive and negative for the past seven months. At -$17.1 billion, May’s balance was the lowest in many years. It was the result of the relatively mild recession in Canada and the more alarming recession in the United States, as well as a 6.4% climb in the value of the loonie versus the greenback during the period. In May, Canada’s month-to-month exports were -6.9% whereas month-to-month imports were -3.5%. A similar pattern, with exports declining twice as fast as imports, was evident in the year-over-year statistics. May 2009 Canadian exports were -32.2% versus May 2008 and imports on the same basis were -18.7%.

Canada traditionally runs a large trade surplus with the U.S., often exceeding $100 billion. This surplus has nearly vanished. On an annualized basis, it was $17.7 billion in May. The last time it was over $100 billion was in July 2008, when world commodity prices, especially for oil, were at their peak. It is easy to say that things will turn around once recovery sets in, but there are external circumstances that have to be reckoned with.

Waxman-Markey is a Threat to Canada’s Oil Exports

The Waxman-Markey Energy bill in the United States is a further threat to Canada’s trade position. It raises the spectre of imposing “green tariffs” on energy exports from Alberta’s Oil Sands. The name of the bill is based on the two chief proponents, Henry Waxman (Democrat California) and Edward Markey (Democrat Massachusetts). The bill was passed by the House of Representatives on June 26 and has now gone to the Senate.

The bill proposes a “cap and trade system” to reduce carbon dioxide and other “dirty” by-products from industrial processes. Companies must have a permit for each ton of carbon dioxide that they emit up to a pre-determined maximum (the “cap”). To exceed that maximum, they must acquire more permits (the “trade”) which are likely to be sold on the open market. Thus, there will be a strong financial incentive to reduce emissions.

The maximum allowance will be lowered each year, requiring that newer pollution-removing technologies be installed. The aim is to cut emissions by 17% versus 2005 levels by 2020. Longer-term, the goal is to reduce emissions by 83% at the century’s mid-point, 2050. A large percentage of the initial vouchers will be issued free and primarily to the electric power industry. Critics say that this is unfair since about half of U.S. electricity comes from heavily-polluting coal-fired generating plants. It is the oil and gas sector that will bear the most severe hardship in the early stages of “cap and trade”.

Foreign companies will be held to the same standards as American companies or be required to pay a fine, putting them at a competitive disadvantage. Hence the notion that this is a “green” tariff. “Offsets” through lowering emissions in other ways (e.g., planting trees) or through clean-air investments in less-developed nations complicate the analysis.

Ottawa’s Response

Ottawa has responded by saying that its pollution standards will be every bit as tough as in the U.S., or tougher. However, if the wording of any Canadian bill is not exactly the same as the U.S., there has to be concern that this will be used as an excuse to limit access to the U.S. market. There have already been indications by world trade-monitoring agencies that such a cap and trade system will not violate international trading rules.

Three Conclusions

There are several conclusions to be reached from all of this. First, like it or not, Canadian legislation is now being written in Washington. Political parties north of the border will huff, puff and posture, but the fact is that if cleaner-environment legislation in Canada does not match the U.S. version, Canadian industry will suffer. This spillover of U.S. government policy into Canada is becoming increasingly prevalent. It is why Ottawa and Ontario now own portions of two auto-making companies.

Second, the U.S. is in a more difficult position than it may suppose. The U.S. imports more than 50% of its oil, much of it from regimes that are precariously balanced in terms of being able to ensure supplies. It seems hard to credit that firm supplies from Canada will be put in serious jeopardy. Third, many of the largest operators in the Oil Sands are American-based. Furthermore, several large pipeline expansions have been or are about to be completed between Alberta and huge refinery complexes in Texas, Louisiana and Oklahoma. This is part of a switchover from fields in Mexico that are being depleted.

The Canadian and U.S. economies need to become more integrated, not less, in order to work around potential problems such as this legislation and earlier-in-this-recession “Buy America” provisions. At the same time, Canada should develop other customers for its energy products, the most obvious being in the Asia-Pacific region. Encana’s Northern Gateway Pipeline from the Oil Sands across northern B.C. remains a proposal with a lot of pluses. But it also has its detractors, mainly among environmental lobbyists, who worry about oil spills from tankers coming and going along B.C.’s coastline. 

Canada’s Foreign Trade: The Merchandise Trade Balance

Based on seasonally adjusted monthly figures, projected at an annual rate.
Analysis of Canada's foreign trade position usually focuses on the Merchandise Trade Balance which is goods exports minus goods imports.

Data source: Statistics Canada/Chart: Reed Construction Data - CanaData.