Canada America's Top Trade Ally?

 Canada and the United States have long had the world's largest trading partnership, but that relationship is being tested, according to a new BMO Capital Markets analysis. Following the pandemic's disruptions, globalization gave way to "reshoring, near-shoring, and friend-shoring" as governments, particularly the United States, sought to secure supply lines. According to BMO economists Michael Gregory and Shelly Kaushik, both Canada and Mexico have benefited from this trend, with Mexico leading the way. Trade between Canada and the United States was $920 billion in the fiscal year ending in the first quarter of 2024, with an average of $2.5 billion crossing the border each day. The two-way trade between the United States and Mexico totaled $905 billion and is expected to surpass Canada sometime this year, according to the report.

The world’s largest trading relationship is being tested.

According to U.S. Census Bureau data, two-way trade between Mexico and the United States reached a new high of $5.3 trillion in 2022, as the southern country surpassed Canada as America's largest trading partner. The trade deficit between the United States and Mexico, or the amount by which imports exceed the value of exports, is also far bigger than that with Canada. Mexico's $167 billion imbalance, compared to Canada's $38 billion, "is the largest it has ever been (partly reflecting a shrinking trade deficit with China, which is raising eyebrows in Washington," according to the report. Goods trade between Canada and the United States totaled about $780 billion last year, with services accounting for approximately $140 billion. That equates to a goods trade deficit of approximately $70 billion and a services trade surplus of $32 billion.

How much will Canada suffer if the United States stops exporting to it? How much will Canada suffer if the United States stops exporting to it?

An intriguing thought experiment. Vehicles and car components are the US's largest export to Canada. Parts go back and forth, often numerous times, causing a significant disturbance in the Canadian and American production processes. In the short run, Canadian manufacturing jobs would be impacted (as would American jobs). However, Canada has a large number of domestic auto manufacturing factories, so even if there is some short-term hardship, Canada will be able to function without American vehicles. Imports of popular SUVs and light vehicles from the United States would have to be transferred to other international sources. Oil products. The eastern seaboard of Canada is predominantly supplied with American petroleum. Supply would be affected, but because the oil market is highly fluid, any impact would be brief and dependent on how abruptly shipments were reduced. The American approach would most likely prompt Canada to reconsider establishing a trans-Canadian energy corridor to transport power and oil across the country.

If we look at a retaliatory closure of exports by Canada, we see a picture of

Canada is the United States' top provider of oil imports. The United States would once again become reliant on less secure foreign oil, but would be able to increase output in the medium run. Natural gas. Natural gas, like oil, is a major export into the United States. Although there is sufficient on the world market, the US would be limited in getting it to all markets unless pipeline capacity was expanded. Electricity. The American Northeast relies heavily on electricity from Canada. This shortfall would have a significant impact on the US economy, stifling economic growth for several years until new power generation facilities could be developed. Vehicle parts. Vehicle manufacture, like reverse Canadian trade, would be badly damaged. Foreign-owned competition would gain traction until US domestic industry was able to retool and reconfigure the supply chain. Potash. Canada is by far the world's leading supply of potash for fertilizer. Without fertilizer, American agriculture production would suffer greatly. Wood. Softwood lumber is an ongoing dispute between Canada and the United States. The United States cannot meet its own lumber requirements. Housing prices in the United States would skyrocket.

Canada cannot do much, but it does not need to. Canada is pursuing free trade agreements with the EU and is a member of the Trans-Pacific Partnership. Negotiating FTAs takes years, followed by years of government approval processes, as is the case with the EU and TPP FTAs. Even with them in place, it takes years to establish the trade. They will provide only a minimal benefit to Canada. Another long-term project is the construction of new or expanded pipelines to transport Alberta oil and gas west to the BC Pacific Coast for export to Asia and east to serve central Canada and the Maritimes. These projects are still undergoing extensive regulatory assessment and approval processes. Meanwhile, in the United States, construction on the XL pipeline is underway. This will bring a lot more Albertan oil into the US.