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Partners in Prosperity: How the Canada-U.S. Trade Relationship Goes Beyond Buying and Selling
The importance of the United States as a trading partner for Canada is widely recognized here, but the significance of Canada as a trading partner for the U.S. is often overlooked south of the border.
Business Data Lab
The importance of the United States as a trading partner for Canada is widely recognized here, but the significance of Canada as a trading partner for the U.S. is often overlooked south of the border. While U.S. trade comprises a larger share of Canada’s GDP compared to the reverse, this perspective doesn’t fully capture the economic interdependence of the two countries. The new report, Partners in Prosperity: Exploring the Significance of Canada-U.S. Trade, provides a comprehensive look at the complexities of this relationship and the role of trade policy in both countries’ productivity.
Message from the Chief Economist
While the United States is widely recognized as Canada’s main trading partner, Canada’s economic importance to the U.S. is often overlooked south of the border. That’s one reason this new report — which is being released at a critical time for this bilateral relationship — written by one of Canada’s top academic economists, Trevor Tombe, will make a valuable contribution to public understanding and trade policy discussions on both sides of the border.
Tombe’s research provides a comprehensive look into the massive, deeply interconnected, and mutually beneficial Canada-U.S. economic relationship. His work reveals many fundamentally important points, such as, how we make things together and invest in each other for shared prosperity. Here are a few of the paper’s key takeaways:
1
In this time of growing global uncertainty and protectionism, Canada is a critical and reliable supply chain partner for U.S. companies and consumers.
2
Canada-U.S. trade overwhelmingly involves intermediate inputs. In practical terms, this means that a significant share of Canadian exports to the U.S. are actually inputs for U.S. exports. As such, maintaining efficient cross-border supply chains ultimately makes both countries more competitive at home and abroad, benefitting workers and businesses, and increasing economic resilience to global shocks.
3
Tombe’s analysis reveals the high degree of integration between businesses that involve complex cross-border operations and production processes. He finds that roughly half of all two-way merchandise trade between Canada and the U.S. involves firms exporting to “related parties” in which they have an ownership stake.
4
Adding further nuance, a significant share of Canadian exports to the U.S. come from U.S. companies. Roughly 12% of the total value of Canadian exports to the U.S. consists of value added that originates from U.S. producers. This means that Canadian exports to the U.S. also indirectly generate income and wages for other U.S. businesses and workers, far beyond those specific transactions.
5
Canada is an important export market for U.S. businesses, and is the top export destination for 34 U.S. states.
6
Canadians invest billions more in the U.S. than Americans invest in Canada. The book value of Canadian direct investment in the U.S. is nearly $1.1 trillion versus the $620 billion of direct U.S. investment in Canada.
7
Tombe carefully models the potential impact of a 10% tariff on U.S. imports — as recently proposed in former President Donald Trump’s reelection campaign. He finds that such a tariff would have a large and negative impact, not only for Canada’s economy (reducing real income by 0.9% and labour productivity by nearly 1%), but also for the U.S. economy (decreasing incomes by 0.6% and labour productivity by 0.5%). Trade in energy and autos would be the disrupted most product categories.
8
Things would be even worse if other countries retaliated to the U.S. tariffs with tariff walls of their own. In that case, Canadian incomes would fall by 1.5% and productivity by 1.6%. For the U.S., the declines would be nearly 1%. This means that, if enacted, Trump’s tariffs and an ensuing trade war would result in roughly $800 USD ($1,100 CAD) in foregone income annually for people on both sides of the border!
Stephen Tapp
Chief Economist, Canadian Chamber of Commerce
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