October 3, 2007, marks the 20th anniversary of completion of the negotiation of the Canada-US Free Trade Agreement that was signed on January 2, 1988, and came into effect January 1, 1989. Twenty years ago, the focus of Canada’s international trade policy was the United States economy, the largest market on the globe.

Today, three metaphors inform policy models of Canada’s international trade and the integration of its economy with the world: gateways, global value chains and trade corridors. The metaphors emanate from at least three separate departments of the federal government. The Department of Foreign Affairs and International Trade ”” specifically, the Ministry of International Trade ”” are pur- suing a Gateways model, particularly focused on Canada’s trade with the Asia-Pacific rim. Recently, the federal Department of Industry has sought to drill down on how especially Canada-US trade occurs within corporate enti- ties with the concept of ”œglobal value (supply) chains.” Particularly in the mid- to late 1990s, the federal the Department of Transport focused its policy development efforts on using ”œtrade corridors” as a means of under- standing Canada’s infrastructure needs in respect of trade.

This article is an overview of each trade metaphor, including strengths and weaknesses of each and how they serve the Canadian economy. The focus shifts to the ability of trade corridors to account for the strengths of the other metaphors, and how Canada’s largest export sectors or trade corridors are focused on the US market. Challenges arising from the three most valuable trade corridors are summa- rized and, then, how recent public policy has affected them. Finally, ”œthe Canadian advantage” that arises from Canada’s trade corridors is described ”” factors that position Canada favourably in respect of international trade with the United States, in particular.

Throughout the Chrétien and Martin governments, the gateways metaphor featured prominently, especially as Prime Minister Chrétien organized a series of Team Canada del- egations. The most prominent of these was a series of trade delegations to the People’s Republic of China (PRC), begin- ning in 1994 with provincial premiers and CEOs in tow, that served to highlight agreements already formalized and busi- ness already underway among Canadian companies operating in China. Gateways is focused on the Asia-Pacific rim, and especially on the PRC. This is not with- out good reason. The PRC market repre- sents one of the great consumer growth markets in the world with well over a bil- lion potential consumers. India similarly represents a huge consumer growth mar- ket, also in the Asia-Pacific rim. Roll in the mature markets of Japan, Australia, New Zealand, the United States and Canada, the Asian tigers of Korea, Taiwan, Singapore, Malaysia and Indonesia as well as Latin America’s Pacific coast, and the combined Pacific rim consumer market totals more than 3 billion people, or approximately half the globe’s population. More than 80 percent of this market constitutes a consumer growth market, versus the mature mar- kets of Canada, the US, Japan, Australia and New Zealand.

It’s worth pointing out: the Asia- Pacific market is worth understanding. But does the Gateways metaphor add to our understanding of trade in this market, and is it adequate to encom- pass it? Beyond this, what is the value added to the Canadian economy from Canada’s trading in the Asia-Pacific rim, especially with the PRC?

In ”œSix Trade Corridors to the US: the Lifeblood of Canada’s Economy” (Policy Options, July-August 2006), I arguedthattheadvantageontradeand the growth in that advantage on trade with China goes to China. This is true of both US and Canadian trade with China. Year over year the rate of increase in China’s trade surplus with Canada and the US is not in the single but double digits. In 2005, Canada’s merchandise trade deficit with China was $22.4 billion. In 2006, the deficit was $26.8 billion ”” a rise of nearly 20 percent. Most of China’s surplus is rep- resented in consumer manufactured goods targeting the US and Canadian markets. Canada’s trade deficit with China tends to be offset by commodi- ties: food (grains and oilseeds), petrole- um, coa, and iron. Canadian and US retailers have effectively shifted large segments of their consumer goods sup- ply chain offshore to China. Wal-Mart may be only the most notable example. While trade deficits with China contin- ue to mount up, Canada’s merchandise trade surplus with the US was $141.7 billion in 2006.

Japan has long enjoyed a trade sur- plus with the US and Canada. Again, with Canada, the deficit is offset by Canada’s supplying commodities. Japan’s domination of the US and Canada automobile products market is represented in Toyota Motor Company’s surpassing General Motors as the high- est-selling automobile manufacturing company in the world. Whereas compa- nies like Honda had to work very hard to find US and Canadian dealers in the early stages of its North American market entry, now the shoe is on the other foot with dealers taking less and giving more. Toyota and Nissan’s penetra- tion of the US and Canadian markets is so wide and deep that the companies’ atten- tions are shifting to the PRC and Indian, markets with deals to manufacture and supply cars to these ”œcheap car” markets. Even so, there’s enough room in the North American market for such interlopers as Hyundai to move from the entry stage to a brand with growing equity among US and Canadian consumers.

Waiting in the wings for North American entry is a relative newcomer (within the last five years) to car manufacturing, Tata Motors, which has long manufactured trucks for the Indian market. Tata has effec- tively recreated the ”œcheap car” mar- ket focusing, first, on its domestic consumer market in India, but it is well along entry into the Australian, New Zealand, Russian, eastern and central as well as western European, and the potentially huge Latin American markets. India’s engineering acumen and capacity rivals that of Japan, western Europe and North America. India’s cars are coming soon to a dealer near you!

The Gateways metaphor is one that emphasizes opening up Canada in return for opening up opportunities off-shore in the Asia-Pacific rim, espe- cially the PRC. But, again, this open- ness has translated into growing trade deficits as Canadian and US consumer demand for cheap manufactured goods from (for example) China and higher quality manufactured goods from Japan outpace reciprocal demand for goods of Canadian or US manufacture.

The recent expansions of capacity at the ports of Prince Rupert and Vancouver, and the expansions of high- way and rail transportation capacity, have focused on container traffic of manufactured goods mainly coming into and commodities traffic heading out from Canada’s Pacific shores. Further, most public policy in relation to the Gateways metaphor, including the series of policy forums on Gateways spearheaded by Simon Fraser University, focuses on making Canada’s transporta- tion infrastructure accessible to the Asia- Pacific trade. The abstract from one of a series of conferences on the ”œGateway Corridor Initiative” organized by Simon Fraser University is revealing on this count. Out of some 23 presentations, virtually all concerned themselves with transportation infrastructure.

Measured by the ratio of exports to GDP, Canada’s economy is the second most open to trade among the G8. Measured by the ratio of total trade (exports and imports) to GDP, Canada is, again, second among the G8. The value of Canada’s exports represents 36.4 percent of Canada’s GDP, com- pared to 44.9 percent for Germany’s. They value of Canada’s total trade is equivalent to 70.2 percent of GDP, compared to 84.5 percent for Germany, according to Canada’s State of Trade.

The OECD struggles to measure China’s GDP, so the ratio of exports to GDP is difficult to calculate. But in the Asia Times Online, Lynette Ong esti- mates that the ratio of China’s exports to GDP is double that of India’s. Ong suggests that India’s growth is traceable to domestic entrepreneurship while China’s is due to higher levels of for- eign direct investment. According to a 2007 report in Xinhua, since the coun- try opened to it in 1978, China’s for- eign direct investment (FDI) cumulatively exceeded US$750 billion by the end of June, including US$36.93 billion in FDI in the first seven months of 2007, according to Vice Minister of Commerce Wei Jianguo. He said China had cumulatively approved creation of 610,000 foreign-funded enterprises. Exports by foreign-funded enterprises accounted for 57 percent of China’s exports.

Further, while much of China’s growth is traceable to suppliers focused on serving the North American mar- kets who locate in China, India’s growth is primarily focused on supply- ing domestic demand.

The following questions could be posed in respect of the Government of Canada’s current Gateways, trans- portation infrastructure focus:

  • As long as Gateways is the metaphor informing Canada’s Asia-Pacific trade policy, will Canada focus on leveraging access to its market for Asian-manufactured goods in return for access to especially Asian and Latin American mar- kets for Canada’s higher-value- added goods and services?

  • Are Asian and Latin American markets the best target markets for Canada’s high-value-added, high- technology goods and services?

  • While the Canadian market for Asian-manufactured goods is driven by Canadian consumer demand, is the expenditure of Canadian public monies the best investment in Cana- da’s consumer, business, macro-eco- nomic and national interests?

  • Is there an untapped opportunity for Canadian investors and exporters in India’s market?

The North American Industry Classification System (NAICS) was adopted by the United States, Canada and Mexico in 1997 in the aftermath of the ratification of the North American Free Trade Agreement (NAFTA) by all three countries. The system makes it possi- ble to track exports and imports of all three, sector by sector, and compare ”œapples to apples” and ”œoranges to oranges.” The NAICS is organized, sector by sector, from broadest to nar- rower and narrower categories.

Global value chains ”” formerly known as global supply chains ”” research narrows further within sectors and attempts to get at how trade occurs inside or within bi-national or multi/national companies, especially those operating in the US and Canada.

Because these transactions are internal to companies operating on both sides of the Canada-US border, the research requires a high level of cooper- ation from companies that are Industry Canada’s research targets. A global sup- ply chains conference was held in February 2006 in Ottawa for public ser- vants in the Department of Industry, and a global value chains conference was slated for senior economic policy authorities from the Organization for Economic Co-operation and Development (OECD) member coun- tries, policy analysts from the Federal Government, as well as representatives from businesses, think tanks, and aca- demia, in September 2007.

Industry Canada and others are attempting to understand how this variety of trade ”” trade internal to companies ”” occurs: the management relationships and best practices, as well as transportation infrastructure and arrangements. Whether intentional or not, global value chains research takes a page from Adam Smith’s understand- ing of trade in The Wealth of Nations as, in part, division of labour and his dis- cussion of the advantages of importa- tion of certain products over domestic production ”” in this case, within com- panies, in order to maximize profits.

The clearest advantage to this approach is that it widens its view beyond transportation infrastructure, and starts to get at how trade occurs, especially in terms of management and best practices. It recognizes that trade is more than transportation infrastructure. Further, global value chains research begins to paint a pic- ture of how the Canadian and US economies are integrated by trade ”” at least, how a business enterprise operating on both sides of the US- Canada border integrates its operations by way of trade internal to the enterprise. Global value chains research offers a microcosm, company by company, of how the Canadian and US economies are integrated, sec- tor by sector ”” especially in respect of the Ontario-Michigan automobile manufacturing industry.

The information collected should be extraordinarily useful in adding to our understanding of Canada-US trade. But it is necessarily limited by focusing its research scope on bi-national and multinational enterprises. Further, while it is not as limited in scope as the Gateways project, focused as it is on trans- portation infrastructure, global value chains research does not (yet, any- way) address the influence of contractual, regulatory, statutory and treaty arrangements, let alone matters of culture and human relationships. As I wrote last summer in Policy Options:

Global supply (value) chain research points to how Canada’s trade is organized mainly in terms of businesses, offering a description of Canada’s trade flows. It is helpful. But this pres- ents an inadequate explanation by itself of Canada’s trade capa- ble of informing and providing direction to Canada’s interna- tional trade policy.

The concept of Trade Corridors was first developed in Canada as a public policy project of the federal Department of Transport in the late 1990s. For some time earlier, Trade Corridors had been adopted by a number of regional Canada-US trade marketing initiatives describing themselves as Trade Corridors. But Trade Corridors were consistently described and defined in terms of transportation infrastructure and transportation routes.

The Work Research Foundation departed from this limited understand- ing of Trade Corridors with its book Greenlighting Trade: A Trade Corridors Atlas. Using the North American Industry Classification System (NAICS) and the Harmonized System (HS) data at Trade Data Online, and certain other data from Industry Canada and Statistics Canada, Greenlighting Trade identified Canada’s six highest value export markets, how these are focused on the United States as a destination, and how they tended to integrate the Canadian and US economies.

”œSix Trade Corridors to the US: The Lifeblood of Canada’s Economy” (Policy Options, July-August 2006) pro- vides a summary of the arguments while Greenlighting Trade presents the detailed sector-by-sector research, and organizes it into a number of useful graphs and charts giving a ”œsnapshot- at-a-glance” of Canada-US trade. Greenlighting Trade examines Canada’s six largest export markets organized by sector under the broadest categories of the North American Industry Classification System (NAICS) and the Harmonized System (HS). These mar- kets are described as six Trade Corridors, beginning with the highest value export sectors: automobile man- ufacturing, oil and gas products, machinery and equipment manufac- turing, forest products, commercial services, and food (agriculture and fishing products). A definition of Trade Corridors was developed that endeav- ours to include and encompass not only the matters addressed under Gateways or Global Supply Chains, but also matters not included:

Trade corridors are more than transportation infrastructure. Therefore, trade corridors are defined as streams of products, services, and information moving within and through commu- nities in geographic patterns according to a matrix or ”œcul- ture” of trade agreements and treaties, statutes, delegated legis- lation, and customs that govern and guide trading relationships, institutions, and structures.

With this definition, Greenlighting Trade attempts to understand Canada-US trade ”” and global trade, for that matter ”” in all its facets and fullness. This is an attempt to move the discussion from merely one of infrastructure and prod- ucts ”” important as they are ”” to the role of contracts and the rule of law as well as the human elements of cul- ture and relationships that frame and provide the con- texts for trade. This under- standing of trade can help to prioritize trade on a basis other than solely the value of exports and trade surpluses and deficits. It helps to understand why a trading relationship as Canada-US trade exists, and why it is so large. It also explains how trade tends to integrate the Canadian and US economies. Trade Corridors offers clues to other potentially fruitful trade rela- tionships, bringing these into the prioritization of trading relationships.

Taking a cue from the example of the most valuable trading relationship in the world and, perhaps, in recorded history ”” Canada-US trade conclusions can be drawn based on what makes this relationship, first, possible and then so fruitful. The most fruitful trading rela- tionships will tend to entail geographic proximity; the similarity of legal sys- tems and statutory/regulatory structure; the quality of international relations and treaties between governments; openness to exports and imports and to direct foreign investment; the similarity of business and trading cultures and contractual relationships; and the web and network of personal relationships on a human level.

Therefore, Canada may want to pre- fer trade with India with its quarter bil- lion English-speakers and common law legal system over trade with the PRC.

The Trade Corridors framework pro- vides an explanation of how Canada’s trading emphasis shifted away from Britain to the US in the 19th and 20th cen- turies. It takes into account the impacts of Canada’s geographic proximity to the US over the United Kingdom as well as the US and Canada’s shared history of adherence to common law and the sanc- tity of contracts, and the millions of human relationships among US and Canadian and US-Canadian dual citi- zens. There is more to say about the advantages that Canada enjoys in respect of its trade with the United States.

In Greenlighting Trade and since its publication, a number of opportunities and challenges were identified for Canada’s six most valuable export Trade Corridors markets. Following are the challenges and opportunities of the three most valuable of these, namely automo- bile manufacturing, oil and gas products and machinery and equipment.

The Canada and US auto industries are, in fact, the North American auto industry centred in Ontario and Michigan. This industry represents approximately one-fifth of the total value of Canada’s exports. More than one- quarter of Canada-US trade crosses at the Ambassador Bridge, Windsor-Detroit.

The industry was formerly gov- erned mainly by the Auto Pact, 1965, but is now governed by the Canada-US Free Trade Agreement and the North American Free Trade Agreement and the attached regulations and tribunals. The highway transportation infrastructure serving the industry is further stressed because the Niagara peninsula (Canada) has become the transportation route of choice between New England and the US Midwest for US truckers and for US tourists and students.

The St. Lawrence Seaway and its infrastructure are subject to a Canada- US treaty and a binational commis- sion, the International Joint Commission, established in 1909. As vessels have increased in size, signifi- cant expansion of the seaway has not been forthcoming. The 2007 federal budget privileged hybrid auto manu- factures over non-hybrids and higher gasoline consumption vehicles. Tax credits were made available to the for- mer, and tax levies were announced on the latter. This effectively privileged Toyota ”” with its emphasis on hybrids over Daimler-Chrysler ”” with its recent revival of ”œthe hemi” engine. A North American auto industry already under pressure is feeling that pressure all the more.

US demand for oil and gas continues to ramp up, matched in production by Canada’s oil and gas indus- try, centred in Alberta (see the accompanying illustrations). The oil sands reserves of northeastern Alberta of bitu- men that can be processed into crude, and the Elmworth gas fields of northwestern Alberta that straddle the Alberta-BC border, may repre- sent the largest proven reserves of oil and gas in the world. Near Peace River, Alberta, is another site with huge potential for bitumen extraction already in the early stages of development.

Recent concerns about greenhouse gases and oil and gas consumption will tend ”” at least in the short to medium term ”” to put pressure on the industry. Extraction of bitumen generally requires the consumption of natural gas, with the attendant production of greenhouse gases.

For years, policy analysts have suggested the construction of a CANDU reactor near Fort McMurray and the oil sands extraction sites in northeastern Alberta, and near the projected oil sands sites in northwestern Alberta. A recent proposal would have seen the construction of a reactor near Whitecourt in northwestern Alberta, but the residents recently voted against it. As a result, Energy Alberta announced at the end of August 2007 that it is applying for ”œa Licence to Prepare Site with the Canadian Nuclear Safety Commission” situated near Peace River. From beginning the approvals process through construction to a CANDU being up and running will take up to ten years.

Alberta is effectively becoming a ”œsuper-province” on the order of Ontario because of its economic prowess from oil and gas, spin-offs, and from other infrastructure expenditures in health care. But Alberta doesn’t enjoy the same kind of clout as Ontario in Parliament and the federal government. This requires addressing, and the aspirational culture of Alberta that tends to legitimize Alberta’s political expectations.

In certain quarters of the broad machinery and equipment sector, there seems to be some lack of appreciation for the magnitude of the valueadded and the multiplier effect of Canada’s high-technology engineering sector in space, satellite, aerospace, communications and robotics technology.

Other countries capable of such technology ”” and it’s a relatively short list ”” actively support and privilege their players in this sector over foreign competitors. Even with a commitment to free trade, should the Government of Canada do any differently as long as other governments privilege domestic participants?

Increased US concerns with security add an extra hurdle in respect of technology sharing and the involvement of Canadian engineers and scientists born off-shore from Canada in countries considered suspect by the US government. This could also serve as an advantage to Canada in making it a more attractive destination for high-tech engineers and scientists who would be barred from certain kinds of pure and applied research in the US under its ITAR regime.

For several years, the Alberta government has promoted ”œthe Alberta Advantage” ”” in business, its regulatory regime, its access to energy, for professionals, and in terms of overall quality of life. Here is ”œthe Canadian advantage” ”” Canada’s trade assets identified by employing a Trade Corridors analysis:

  • Canada shares a continent with the US: this gives Canada immediate geographic access to the largest economy in the world;

  • Canada shares time zones with the US: the business day, banking and securities markets operate on the same time zones in both countries.

  • Canadians and Americans work, go to school, and carry on their daily lives concurrently;

  • Canada and the US share the Great Lakes and the St. Lawrence Seaway: Canada and the US share access and management of the St. Lawrence Seaway and the great inland transportation waterways of the Great Lakes;

  • Canada and the US share a common language, English, and both are bilingual. Over the years, several prominent news anchors in the US have been Canadians, most notably the late Peter Jennings. That is because spoken English in one is generally understood in the other. Canada possesses a linguistic bridge to la francophonie ”” French-speaking countries throughout the world. The US possesses a linguistic bridge to iberophones ”” Spanish-speakers, by way of its large Hispanic and Mexican population;

  • Shared legal framework ”” the common law ”” and both have jurisdictions that employ the civil code or Napoleonic Code (Quebec and Louisiana). Although differences between the legal regimes are present, the general adherence to the sanctity of contract informed by a majority common law regime tends to facilitate trade and business transactions between the two countries;

  • Shared popular and mass culture. Canadians are knowledgeable of American pop culture. Several Canadians are American cultural icons. Both share similar spectator and participatory sports interests in baseball, football and golf. When their entrepreneurs meet, they have common ground and subjects to discuss in breaking the ice while they play the links;

  • Shared electrical power grid. Hydro-Quebec sells power through the US northeast grid. Both use  electricity in the same way;

  • Shared and highly integrated transportation network of air, sea, rail and roads. Major Canadian airports have pre-clearance facili- ties, and there is discussion of cre- ating pre-clearance facilities for highway and rail border crossings;

  • Shared communications grid of telephone, cellular service, BlackBerry and Internet;

  • Highly mobile work forces. Canadians and Americans are among the most highly educated peoples in the world, and their credentials, skills and ways of doing business are highly transferable, country to country. This is further enhanced by the NAFTA worker visa;

  • Security, police and armed forces integration and exchanges; and

  • Similar systems of advanced edu- cation. Canada and the US take similar approaches to public education, and their universities are similarly structured.

No trading relationship is perfect. As the two-way trade in goods and services between Canada and the United States approaches $2 billion each and every day, trade irritants are likely to arise.

If Canada and the US are treated as a trading bloc, the value of its trade is exceeded only by the EU-25, or by all of Asia considered as one trading bloc. The two economies possess highly integrated transporta- tion, communications, financial, business, cultural, military and fami- ly networks, and highly similar statutory, regulatory, civil, judicial, political and governmental frame- works. Sector by sector, corridor by corridor, bilateral trade serves to integrate the Canadian and US economies. This integration is mutu- ally beneficial, with the advantage at present going to Canada, with its trade surplus.

Canada must guard and enhance its chief trading relationship while seeking to initiate and grow other trad- ing relationships. Taking as a model its trading relationship with the US, Canada should target economies where it holds in common characteristics that will pave the way for mutually benefi- cial trade and economic integration. Trade Corridors is the best model for understanding how Canada-US occurs at present, for understanding how trade integrates the two economies, and for identifying Canada’s best mar- kets for future trade expansion.

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