Canada’s Trading Imbalance: A Historical Challenge Repeated Today
Our reliance on the United States has led us to a situation in which we are so intertwined that Canadian businesses nearly wholly depend on Americans to be customers and suppliers.
Over the last 157 years, Canada has been defined as a trading nation. Dependent on accessing the global market, our ability to trade with the world freely and reliably has ensured our high standard of living and immense wealth as a country. Be it with nations throughout Europe, the Americas, Africa, or Asia, Canada has worked to develop deep personal connections with people across the globe who are our customers, suppliers, and intermediaries. However, the history of our trading relationships has not always been one of balance or diversification. Historically, Canada has relied overwhelmingly on one nation to ensure our economic growth at any one time; what began with the British Empire transitioned to the United States following the Second World War where it has remained today.
This history of our reliance on one country (or empire) has led us to an existence in which we are so intertwined with the United States that Canadian businesses are nearly wholly dependent on Americans to be customers and suppliers. This reliance has become entrenched through a concoction of American wealth, Canadian policy, and infrastructure limitations. Seventy-five-plus years of this relationship have resulted in a self-repeating cycle that has placed Canada in a highly precarious position, and it seems there is no urgency to remove ourselves from it. Our lack of investment and desire to diversify our economy and trading portfolio beyond the United States has made us vulnerable to domestic American politics and American leadership within the democratic capitalist West.
Such few investments beyond one or two key nodes in our supply chains, controlled by an exclusive limited few, have resulted in an economy being held captive in trade with the United States. We have built a country that works north-south, not east-west. With a return to American isolationism and protectionism, it is time Canada wakes up to the folly of our choices and seeks to diversify beyond the United States.
How We Got Here
Prior to confederation, and for the first half of our country’s history, Canada maintained a mercantilist economic relationship with the United Kingdom, resulting in much of our international trade flowing through the British Empire. To facilitate this trade, the cities of eastern Canada, particularly Halifax, St. John’s, Montreal, and Toronto, experienced rapid population and economic growth. To move raw materials and agricultural products east, Ontario, Quebec, and the Maritimes received substantial investment to better facilitate export (and import) through the Ports of Montreal and Halifax. The St. Lawrence Seaway received extensive infrastructure investment, and rail companies developed a corridor linking Windsor to Quebec City. Aside from the transcontinental railroad – which served the dual purpose of preventing the United States from annexing Western Canada and bringing British Columbia into confederation – there was a lack of infrastructure investment throughout the prairies. This lack of investment resulted in Canada failing to diversify beyond the British Empire.
Fast forward to the 1950s, and following the defeat of Nazi Germany and Imperial Japan, Canada shifted dramatically towards trading with the United States over the United Kingdom. While the United Kingdom’s economic woes were a major contributor to this shift, the growing population of Western Canada – thanks to the trans-Canada railroad – resulted in a newly empowered Canadian federal government which spent on infrastructure from coast to coast. By 1965, the industrialization of central Canada was complete, and the American Midwest and southwestern Ontario were linked with the Auto-Pact of 1965. Since then, with the signing of NAFTA (and then later CUSMA), Canadian infrastructure dollars to fund economic development (both privately and publicly) have been put towards projects that further develop our interconnectedness with the United States, be it new pipelines, railways, or highways.
It is worth noting, however, that the march towards our near complete economic reliance on the United States during the 20th century was acknowledged as a problem in Ottawa during the early 1970s. Under Prime Minister Pierre Trudeau, his Secretary of State for External Affairs, Mitchell Sharp, penned the ever-famous “Canada-U.S. Relations: Options for the Future,” in which he argued that Canada should pursue a ‘Third Option’ in its dealing with the U.S.
The project was a failure (as Canada was unable to diversify beyond the United States), and its only notable accomplishments were the establishment of Petro-Canada and the Foreign Investment Review Agency. The project was formally ended with the election of Brian Mulroney as Prime Minister in 1984.
The Situation Today
Following the shift of investment and culture away from the United Kingdom and towards the United States during the 20th century, Canada now finds itself in a pretty startling situation. As of 2023, the United States consisted of 77% ($594.5 billion) of our annual global trade exports, China was second at 4% ($30.5 billion), and Japan was third at 2.1% ($15.8 billion). With Canada’s trade-to-GDP ratio now exceeding 65% (the United States is 27% for comparison), we are highly dependent on fluctuations in global commodity markets, economic trends, and international relations to maintain our economy at home.
Canadian businesses and public investment have overwhelmingly been focused on developing further connections with the United States, making trade with nearly anyone else in the world uneconomical. It is imperative as a country we fix this.
What We Can Do About It
To meet the world and diversify beyond the United States, Canadian businesses must take to the seas and look beyond North America. With the United States serving as our only land border to the south, Canada must focus on developing trans-Canada infrastructure with a priority on increasing export capacity.
This increase in export capacity can be built by constructing new pipelines from east to west. The creation of additional road and rail connections that transect the northern half of our provinces. Investment in ports, particularly deep-sea ports in the Hudson Bay, the Maritimes, and North-Western British Columbia. A substantial increase in export terminals for natural gas and grain. Changes to import and export rules and regulations so they are easier to understand, and a review of Canada’s trade commissioner program as we develop new relationships and discover new customers around the world.
Diversifying Canada’s trading relationships is something we must do to prepare Canada for the rest of the 21st century and the approaching 22nd century. As the United States steps back from its leadership role in the democratic West, Canada must cement new ties with like-minded allies and partners to help further its economic resiliency. New relationships (and export capacity) will bring new customers and suppliers, thereby reducing our reliance on one single country for our economic well-being.
Part 2 to follow.