Image of the Day: Canada-U.S. Trade

The Globe and Mail offers some interesting graphs of where Canadian business leaders think their export market heading in the near-future.

Check out all the results and related articles here, but this graph was the most surprising--showing that most  participants believing America's share of Canada's export market will stay the same or even increase:

BTB: Bilateralist Reports on Progress, and (Relative) Risk to North American Exporters

Luiza Ch. Savage, at her blog Bilateralist and at Mclean's D.C. correspondent, shared an excellent BTB update chart prepared by Birgit Matthiesen that details and has and has not been accomplished by the governments of Canada and the United States.

You can find Matthiesen's 2-page side-by-side comparison here, and Savage's Maclean's article here.

Savage, not getting buried in details, succinctly gets to the 'impact' of differing rates of success on BTB's various objectives:

This is complicated stuff and no one expects overnight changes. But timing matters, too. For example, the governments reported progress on a pilot projects for harmonizing cargo screening for North-America-bound cargo at the ports of Prince Rupert and Montreal. There is a risk that quick progress on such“perimeter” elements coupled with slow progress on expediting the land border between Canada and the U.S. could inadvertently disadvantage North American manufacturers relative to exporters from, say, Asia or Europe.

Says Birgit Matthiesen, the Washington representative for the Canadian Manufacturers and Exporters:

“With the increased competition from third countries in the last few years, and what is anticipated from the TPP and Canada-EU trade agreement, manufacturers in Canada and the U.S., and their business partners, are going to be looking for real relief from transactional costs and compliance burdens at the land border. If not, the North American supply chain could be at a competitive disadvantage.”

Woodrow Wilson Center Talks Shale Gas With Jim Slutz

Jim Slutz, president and managing director of Global Energy Strategies LLC, talks on American shale gas production in this informative interview with Lynann Butkiewcz.

Some highlights:

• America has tons of natural gas. "[America's] natural-gas resource base, which includes proven and unproven reserves, is now estimated at 2203.0 TCF, or almost 90 years of supply."

•  Shale gas will soon be leading source of U.S. natural gas.  "EIA (Energy Information Administration) projects that from 2010 to 2035, natural gas production from shale formations will rise from 23% to 49% of the U.S. gas supply. The term “game-changer” is often used and is very appropriate for this development." 

• FTAs and U.S. regulation of natural gas exports.  The Department of Energy (DOE) authorizes natural gas exporters, using a two-tiered process.  For countries that America has free-trade agreements (FTAs), the export automatically considered in the public interest and, once all regulatory steps are taken,  DOE authorization is granted.  But for those nations with FTAs, a more complicated process follows.  In short, America's trade relations and review process has a direct impact on American natural gas exporters.  Learn more about DOE's natural gas regulation, which is governed by the Natural Gas Act of 1938.  Finally, check out Michael Levi's discussion paper, A Strategy for U.S. Natural Gas Exports, a publication of the Brookings Institute's Hamilton Center.  The paper reviews U.S. gas regulation, and puts forward a trade strategy for the U.S. to push for global market-based pricing and transparency.

• America and Canada's energy relationship--and Canadian pipeline concerns.  "The United States can be a partner to Canada as a market for additional crude oil from the oil sands. The only restriction is the need for added pipeline capacity. The United States has extra capacity in oil refineries, which are specifically designed to process heavy oil, so it makes economic sense to ship more oil to the United States. The regulatory delays by the U.S. government regarding the Keystone XL pipeline are directly responsible for Canada’s increased urgency in seeking oil-export opportunities in Asia. This has also raised concerns by Canadians about whether Canada is overly reliant on the United States as a trading partner."

• Challenges to exporting natural gas to Asia:  Asia's long-term gas lock & oil-pricing pegs. America's short-term contracts put barriers to exporting cheaper U.S. natural gas to Asia. 

"It will be a long time before a global gas market develops. While there may be movement in that direction, challenges exist to the development of a U.S.-style, Henry Hub–type market. Gas markets in Asia and the United States function quite differently. In Asia, much of the gas supply depends on LNG, which requires huge upfront investment and therefore is predicated on long-term contracts, typically twenty years. These contracts use oil prices as a basis for determining gas value. In the United States, gas is traded independently of oil price and on a much shorter-term basis. A typical contract in the United States is measured in months, not years. Long-term contracts will remain a key component of LNG project development because of the financing required to undertake the infrastructure construction. The other important component of pricing is to remember is that there is a significant cost to liquefy and transport LNG, in most cases more than the cost of the gas. Therefore, just because there is a current significant differential between U.S. and Asia prices does not automatically mean that exporting gas to Asia will be economically attractive for the long term." 

More On Canada’s Exports

By Keith Edmund White, Editor-in-Chief

Canada's losing its share of the global export market, some blame the United States, but is this whole debate just a way to bury potentially troubling Canadian marco-economic policies underneath a swallow rhetorical debate on Canada's place in the world?

So...is America to blame for Canada’s dwindling share of the world’s export market? And what does this matter anyhow?

Last week’s speech by the Governor of the Bank of Canada Mark Carney has led to some interesting economic discussion in Canada. 

Carney, noting Canada’s decade-long slide in the global export market, placed blame on “overexposure to the US market and underexposure to emerginng markets….”

But William Watson from McGill makes an interesting counter-point when it comes to the impact of Carney’s words: in short, let the markets work. From Watson’s editorial in the Ottawa Citizen:

On average since 2000, the rich countries to which we send 85 per cent of our exports have been growing at under two per cent per year, while the “emerging markets,” some of which have pretty much completely emerged by now, have been growing at over four per cent. The import of these numbers is that Canadian exporters will want to think about focusing more on rapidly growing markets and, if they agree with Carney that these trends will continue, less on our traditional markets.

Of course, the great thing about a capitalist economy is that businesses don’t actually need a high government official to tell them where to turn their export intentions. As if on cue, on Wednesday Statistics Canada released its annual review of our merchandise trade. While in 2002, 87.1 per cent of our exporting and 62.6 per cent of our importing was with the United States, last year those numbers were 73.7 and 49.5 per cent, respectively. Canadian businesses, not policy-makers, are who we want making decisions about where they can get the best deals for their products. It seems they’re already on the case.

Naturally, this back-and-forth is covering up an important question: why are Canadian exports getting this much attention? Well, first, Carney is reacting to Canada’s post-recession export boom not really mirroring past trade trajectories. Second, Canada’s exports represented 26% of the Canadian economy. So it is an important chunk of Canada’s economy. But, on the other hand, simply increasing exports doesn’t naturally equate to greater economic growth: if new exports, for example exports in manufactured goods, triggers the need for more oil imports, could dilute the impact of positive export growth.

But the real issue behind this debate is how Canada can keep finding markets for their exports, especially in the face of an American economy is not growing like it was in the 90s. With Canada's population 1/9 the size of America's but maintaining an average income that is 50% higher than America's, diversifying markets in face the of an uneven American recovery seems an obvious economic and political priority. And this is especially important as the Canadian economy has been floating on robust consumer spending that has, in Carney's opinion, generated an unsustainable increase increase in household debt.

But, as Watson points out, Canadian businesses act economically rationally: having policy makers tell Canadian businesses where to trade doesn't really make sense--the businesses will make the best choice for them. You want to make Canadian exports more competitive? Raise the currency. You want to cut back Canadian debt levels? Raise interest rates. What I take from his article: 'Thanks, but don't lecture Canadian businesses for responding to the environment you've put them in.'

Naturally, these policies in effect take away 'free money' that Canadians are enjoying: a stronger dollar allows consumers to enjoy travel and more foreign goods, and low interest-rates allow them to over-consume, which is always fun until the party ends. And why would a Conservative government, just enjoying its majority government, want to get in the way of this party. So, instead, we seem to see the Bank of Canada Governor's speech trying to find another way to protect Canada's long-term economic interests without engendering public blow-back: let's focus on who are businesses are and are not trading to and if we can put some blame on the States--why not?

But, whether or not my cynical reading is even close to accurate, one thing is clear: that there’s some serious economic soul-searching going on in Canada, and it might have bad ramifications on the Canada-U.S. bilateral relationship. The graphs below show just how important a trading partner the United States is to Canada.

But, first, more from the AFP article assessing Canada’s current export health:

Over the past decade, Canada's share of world exports has declined from about 4.5 percent to about 2.5 percent, and its manufactured-goods export market share has been cut in half, he added. 

Meanwhile, export growth is almost five percentage points slower than the global average per year, ranking Canada's performance as the second worst in the G20. 

Carney pointed to Germany, which has maintained its market share in manufactured goods by exporting capital goods and automobiles to China and Australia's rising exports of commodities to China as examples to follow. 

He noted that strong household spending has lifted Canada's fortunes of late, but at a cost -- rising household debt, which he said is "unsustainable."