Last year, over $1 million worth of goods crossed our northern border every minute of every day. And that doesn't include trade in services. As a result, Canada, with a population of 34.3 million, continues to be the United States' largest trading partner. What's more, Canada is the biggest merchandise export market for 34 American states, and the second biggest for another 11, the Canadian government says.

Although Canada-U.S. bilateral trade in goods reached $525 billion in 2010, it's considerably lower due to the global recession than its 2008 high of $600 billion, states the U.S. Department of Commerce. Unlike the United States, Canada's economy suffered only a mild downturn. And although volatility exists, the Canadian economy appears on its way to recovery.

In fact, Canada's unemployment rate peaked at 8.5 percent during the global economic crisis and fell to 7.3 percent in August, according to Statistics Canada. Comparatively, the U.S. unemployment rate rose to a high of 10.1 percent in October 2009 and declined to 9.1 percent in August, the U.S. Bureau of Labor Statistics reports.

The Global Recession, China and Energy

For a variety of reasons, Canada's financial system and housing market remain relatively strong and did not incur the same problems experienced in the United States. Plus, China's demand for Canada's considerable mineral, energy and agricultural resources helped our northern neighbor remain resilient against declining U.S. demand. During the last 10 years, Canadian exports to China tripled, surpassing Canadian exports to Japan, landing China as Canada's number three export market just after the United Kingdom, Statistics Canada reports.

Overall, China is Canada's second largest trading partner. But some analysts say that if current patterns continue, Canada's role as a suppler of raw materials and energy products to the United States could shift to China, just as Canada's exports to the United Kingdom shifted to the United States a century ago.

Currently, Canada is the most significant source of U.S. energy imports, as well as the most secure. Its crude oil and products sales to the United States reached 2.54 million barrels a day in 2010. This represented nearly 50 percent more than from the Persian Gulf and 22 percent of total U.S. imports. With 175.2 billion barrels, Canada possess the world's third largest proven oil reserves behind Saudi Arabia and Venezuela, is the world's third largest natural gas supplier, and is one of the largest producers of hydroelectricity, the U.S. Energy Information Administration says.

North American Economic Integration

"Canada and the United States are staunch allies, vital economic partners, and steadfast friends," says Canadian Prime Minister Stephen Harper. We couldn't agree more.

Evolving from the U.S.-Canada Auto Pact into the U.S.-Canada Free Trade Agreement, and finally, into the North American Free Trade Agreement, these accords have eliminated barriers to trade, investment and the movement of people across our shared border. In turn, this has greatly advanced north-south integration, stimulated the development of sophisticated supply chains and boosted bilateral trade. But that’s not all.

Economic integration also has boosted capital flows, enhanced productivity, advanced the spread of technology, increased the number of product choices while keeping prices low for consumers, created more good-paying jobs, and elevated North American competitiveness.

In this new and dynamic global business environment, the United States and Canada don't just make goods for each other. We make goods together for world markets. Consequently, it's not uncommon for a product to begin its manufacturing process in the United States, be shipped to a plant in Canada where valuable components are added and tested, be trucked back to a U.S. facility for completion and packaging, then be exported to a European buyer.

To ensure expeditious passage across the U.S.-Canada 5,525 mile-long border, a vital factor impacting supply chain efficiencies, corporations on both sides of the border continue to satisfy requirements and participate in voluntary security programs. This is extremely important since border delays drive up costs, drive down productivity, and shift just-in-time delivery to just-in-case procedures that demand larger, more expensive inventory stockpiles.

Surprising to many, the cumulative expenditures of delays are enormous. Thus, analysts say it costs $800,000 for every additional hour of inventory to cover the risk of shipment disruptions of American parts headed to Canadian plants, former Canadian Ambassador Michael Wilson estimates. Additional costs include wasted fuel in idling trucks, additional drivers to satisfy stringent trucking hours and service requirements, and extra trucks to account for those waiting in line. But this is only part of an emerging problem. If, for example, it becomes cheaper to ship Chinese automobiles east to Canada than to truck American automobiles north, other issues are sure to emerge.

Trade and Investment

Last year, the United States exported $249 billion in goods to Canada. The 10 largest export categories included transportation equipment; machinery, except electrical; chemicals; computer and electronic products; primary metals manufactures; food manufactures; fabricated metal products; electrical equipment, appliances and components; plastic and rubber products; and miscellaneous manufactured commodities, according to the U.S. Department of Commerce.

In 2010, cumulative U.S. direct investment in Canada, known as the direct investment position on a historical-cost basis, reached $297 billion. This represented approximately 7.6 percent of total U.S. direct investment abroad, the U.S. Bureau of Economic Analysis reports.

To increase its global competitiveness and attractiveness, Canada is reducing taxes. Stated by the Canadian Government, it now has the lowest payroll taxes among G7 countries, and by 2012, its corporate income tax rate will have declined from 18 percent in 2010 to 15 percent, representing less than half of the U.S. rate. It's also offering a variety of industrial incentives, as well as research and development subsidies that rank among the most generous in the world.

With this in mind, the U.S. Department of Commerce has identified leading Canadian sectors to target for export and investment opportunities. They include automotive, aerospace, oil and gas, defense products and services, renewable energy, information and communications technology, pollution control and waste treatment, and mining. In the agricultural industry, these include food service, snack food, fresh vegetables, fresh fruit, organic food, and red meat.

American importers, manufacturers, distributors, retailers, and consumers also benefit from Canadian trade. In 2010, the United States imported $277 billion of goods from Canada. The 10 largest categories included oil and gas; transportation equipment; chemicals; primary metal manufactures; petroleum and coal products; machinery, except electrical; food manufactures; paper; computer and electrical products; and plastic and rubber products.

During the same year, cumulative Canadian direct investment in the United States reached $206 billion, the source of 8.8 percent of total foreign direct investment in the U.S. Overall, the largest share of investment in both countries by the other was in manufacturing.

Currently, the United States remains a party to 11 free trade agreements involving 17 countries. Canada is a member of seven agreements with 11 countries, according to the World Trade Organization. Not surprisingly, our northern neighbor is in the process of negotiating nine new deals involving 37 countries. Although highly dependent on the United States, Canada is seeking to diversify its export base. Thus far, Canada’s reliance on the United States as a trading partner has declined from 75 percent of total trade (the sum of exports plus imports) in 2005 to 68 percent in 2009, reports Statistics Canada.

Seek Canadian Opportunities

As per the North American Free Trade Agreement, on January 1, 1998, Canada eliminated tariffs on all industrial and most agricultural products imported from the United States. In 2010, it announced a unilateral elimination and phase-out of tariffs on manufacturing inputs from countries receiving Most Favored Nation status.

As Canada continues to become a more attractive destination, American exporters and investors are encouraged to look north to an ever-growing market.

This article appeared in International Insights, a publication of Fifth Third Bank, September 2011.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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