Summary

Relations between the United States and Canada have generally been cordial since the War of 1812, the bicentennial of which is now being celebrated. Bound together by a common 5,500 mile border—"the longest undefended border in the world"—as well as shared democratic traditions, the two countries are also increasingly integrated economically through the North American Free Trade Agreement (NAFTA).

The two North American countries continue to cooperate widely in international security and political issues, both bilaterally and through numerous international organizations. Canada's foreign and defense policies are usually in harmony with those of the United States. Areas of contention have been relatively few, but sometimes sharp, as was the case in policy toward Iraq. Since September 11, 2001, the United States and Canada have cooperated extensively on efforts to strengthen border security and to combat terrorism, particularly in Afghanistan. Both countries were also active participants in the U.N.-sanctioned NATO mission in Libya.

The United States and Canada maintain the world's largest bilateral trading relationship, one that has been strengthened over the past three decades by the approval of two major free trade agreements. Although commercial disputes may not be quite as prominent now as they have been in the past, the two countries in recent years have engaged in difficult negotiations over items in several trade sectors, including natural resources, agricultural commodities, and intellectual property rights. However, these disputes affect but a small percentage of the total goods and services exchanged. In recent years, energy has increasingly emerged as a key component of the trade relationship, with the construction of the Keystone XL pipeline emerging a major source of contention. In addition, the United States and Canada work together closely on environmental matters, including monitoring air quality and solid waste transfers, and protecting and maintaining the quality of border waterways.

Many Members of Congress follow U.S.-Canada environmental, trade, and trans-border issues that affect their states and districts. In addition, because the countries are similar in many ways, lawmakers in both countries study solutions proposed across the border to such issues as federal fiscal policy and federal-provincial power sharing.

This report begins with an overview of Canada's political scene, economic conditions, security and foreign policy, and environmental initiatives, focusing particularly on issues that may be relevant to U.S. policy makers. This country survey is followed by several essays on current bilateral issues in the political, international security, trade, and environmental arenas. The questions following each summary are designed as potential inquiries to Canadian officials to promote thought and discussion among policy makers.

Overview¹

History, proximity, commerce, and shared values underpin the relationship between the United States and Canada. Americans and Canadians have fought side-by-side in both World Wars, Korea, and Afghanistan. As a founding member of the North Atlantic Treaty Organization (NATO), Canada contributed substantially to the alliance during the Cold War, and more recently in the Libya and Afghanistan conflicts. The U.S. and Canadian armed forces engage in close cooperation, both in defense of North America and in overseas missions. The countries share]s "the longest undefended border in the world" although heightened security concerns after 9-11 have led to stricter border controls.

The United States and Canada also share the largest commercial relationship in the world with more than $1.6 billion of trade crossing the border each day and with the two nations also maintaining substantial investments in each other's economies. Economic integration has resulted from the North American Auto Pact of 1965, the U.S.-Canada Free Trade Agreement of 1988, and finally the North American Free Trade Agreement of 1993.

Canada is a constitutional monarchy with Queen Elizabeth II as sovereign. In Canadian affairs, she is represented by a Governor-General, now David Johnston, who is appointed on the advice of the Prime Minister. The Canadian government is a parliamentary democracy with a bi-cameral Westminster-style Parliament: an elected House of Commons and an appointed Senate, with 308 Members of Parliament (338 after the next election) and 105 Senators. At elections, the party that wins the largest number of seats in the Commons is called upon to form a government. Canada consists of 10 provinces and 3 territories, each governed by a unicameral assembly.

Relations between the two countries are generally cordial, but can be strained from time to time by individual issues, such as with the Keystone XL pipeline currently, or Canada's decision not to participate in the Iraq war in 2003. Unlike many countries, whose bilateral relations are conducted solely through foreign ministries, the governments of the United States and Canada have deep relationships, often extending far down the bureaucracy, to address matters of common interest. Initiatives between the provinces and states are also common, such as the October 2013 Pacific Coast Action Plan on Climate and Energy between California, Oregon, Washington, and British Columbia, or the various Great Lakes initiatives.

However, with a population and economy one-tenth the size of the United States, Canada has always been sensitive to being swallowed up by its southern neighbor. Whether by repulsing actual attacks from the United States during the War of 1812, or by resisting free trade with the United States for more than the first century of its history, it has sought to chart its own course in the world, yet maintain its historical and political ties to the British Commonwealth. Some in Canada question whether U.S. investment, regulatory cooperation, border harmonization, or other public policy issues cede too much sovereignty to the United States, while others embrace a more North American approach to its neighborly relationship.

Prime Minister Stephen Harper of the Conservative Party has led the government of Canada since 2006. The Conservatives formed a minority government after the 2006 elections—and likewise after a snap election in 2008—until 2011, where another election gave the Conservatives a majority in Parliament. The next election must occur by October 2015.

The official opposition is the New Democratic Party (NDP) led by Thomas Mulcair. This Parliament is the first in which the NDP serves as official opposition, primarily through newfound strength in Quebec (where it has previously not been a factor) and its charismatic former leader Jack Layton, who died three months after the election. The NDP also profited from the collapse of the Liberal Party vote. The Liberal Party—long known as the "natural party of government" due to its dominance in the 20^th century—came in a weak third. The new leader of the Liberal Party is Justin Trudeau. He was first elected to Parliament in 2008 and is the son of Pierre Trudeau, a long-standing Prime Minister from 1968 to 1984. The separatist Bloc Quebecois was reduced to two seats.

The Harper government came to power after 13 years of Liberal Party rule; first led by Jean Chretien (1993-2003) followed by Paul Martin (2003-2006). Liberal party dominance in the country was eroded due to the "sponsorship scandal," in which, under a program intended to build support for Canadian unity, the Liberal government had funneled C$100 million in public funds for dubious contracts to Québec advertising firms associated with the Liberal party.² The Liberal government's primary achievement, arguably, was the sorting out of the country's finances, which in 1993 were in dire straits. Canada's debt to GDP ratio had reached 101.6%, its bonds had been downgraded, and the country was facing higher interest rates. Prime Minister Chretien and his then-Finance Minister Paul Martin launched an austerity budget in 1995 that contained across-the-board spending cuts. Deficits were eliminated by the 1998 budget and budgets remained balanced through 2009. Notably, the Chretien government also refused U.S. entreaties to join the war against Iraq. A second reason for the Liberal downfall can be attributed to the 2003 unification of two conservative parties: the Progressive Conservatives (PC) and the Canadian Alliance, a fiscally conservative, western Canadian faction dissatisfied with the eastern tilt of the traditional parties.

Initially risking votes of no-confidence as a minority government, Harper generally has restrained the more conservative members of his caucus and governed from the center. He eschewed bringing up social issues such as abortion, and concentrated on economic issues. Early in his tenure, Harper was willing to challenge public opinion over Afghanistan, where the Liberal government deployed troops in 2002. In 2006, he won a narrow vote in parliament to keep Canadian troops in Afghanistan for two additional years, although, subsequently, Canadian troops did not end their combat role there until July 2011.

The financial crisis of 2008-2009 seemingly took the government by surprise. A budget bill introduced in November 2008 contained proposals for the elimination of federal funding for political parties, but did not contain any stimulus measures to combat the accelerating economic downturn. The opposition parties, which would have been severely affected by the plan, rebelled and were poised to vote down the government—ostensibly because Harper had failed to put forward a stimulus package that would respond to the economic downturn. Harper withdrew his proposals and, to avoid the no-confidence motion, prorogued (suspended or recessed) the session of parliament until January 2009; the shutdown was sharply criticized by many.³ The government came back in March 2009 and introduced a stimulus package, known as the Economic Action Plan, a combination of increased spending and tax cuts. The 2009 budget also marked a return to deficit spending for Canada after 12 successive budgets in balance or surplus. The Conservative government introduced a budget with a small C$2.5 billion deficit in 2014, and it plans a return to surplus in 2015.

As of April 10, 2014

Source: Parliament of Canada

The Conservatives lost a no-confidence vote on March 25, 2011, prompting Canada's most recent elections, held on May 2, 2011; it was the fourth time Canadians had gone to the polls in seven years. But unlike the last three elections, which returned minority governments, this one resulted in significant changes for all of the national parties: first of all, the Conservatives managed to capture a comfortable majority of 166 seats in the 308-seat parliament up from 144. In second place was the NDP, which wound up with 103 seats, almost triple the 36 they had held before. The Liberals won just 34 seats, down from 77, making them the third-largest party for the first time in the nation's history. The separatist Bloc Québecois (BQ) was reduced from 48 down to just 4 seats—causing it to fall below the threshold for official party status. Finally, the Green Party managed to win a seat—another first.⁴

In explaining the results, observers note that many Canadians reportedly had become comfortable with Harper's personality and leadership style. In addition, Harper has generally avoided divisive social issues and has instead succeeded in positioning his party more toward the center—a technique that had been used by the Liberals between 1993 and 2006. Harper's trump card, however, was the economy. Since the mid-1990s, both Liberal and Conservative governments had run budgetary surpluses, leaving the government in a good position to introduce limited stimulus measures during the global economic crisis, from which Canada emerged in better shape than most other developed countries.

With his new Conservative majority, Prime Minister Harper pushed several proposals through parliament, including repeal of the Canadian Firearms Registry, elimination of the government's role in the Canadian Wheat Board, a strengthening of the criminal code, and a reduction in election subsidies for political parties.

On economic matters, Harper has maintained his party's focus on fiscal retrenchment, employment, energy, and trade issues. He has championed the return to budgetary surplus, with the government reportedly resorting to gold sales and the sale of diplomatic property overseas to ensure accounts balance by 2015.⁵ Harper has made the promotion of the Canadian oil sands a key economic priority, and has personally lobbied for approval of the construction of the Keystone XL pipeline. His government will continue to assert its sovereignty in the Arctic. It also has pursued an ambitious free trade agenda, including announcements of the conclusion of FTAs with the European Union (October 2013) and South Korea (March 2014) (see below).

Senate Reform

One issue that has caused headaches for the Conservatives is reform of the Senate. Reform of the Canadian Senate has long been a top aim of Stephen Harper and western conservatives, who have in the past supported a "Triple E Senate"—elected, effective, and equal. The Senate is modeled after the House of Lords in the United Kingdom. While it can reject bills, it rarely does so, but it acts a chamber of "sober second thought" where bills can be modified or amended. Senators are appointed by the Governor-General at the recommendation of the Prime Minister and can serve until the age of 75. There are 105 seats in the Senate, with 24 Senators appointed to each region: the Maritimes, Ontario, Quebec, and the West. Newfoundland and Labrador (6 seats) and the Northwest Territories, Yukon, and Nunavut (1 seat each) make up the balance.

The nonrepresentative nature of Senate—the western provinces and Ontario are considerably underrepresented by population—their lifetime tenure and appointment by the Prime Minister, as well as recent expensing scandals have led many to seek reform or abolition of the chamber. Prime Minister Harper campaigned on Senate reform and in 2013 proposed that Senate terms be limited to nine years and that the provinces be allowed to hold elections for their Senators. The bill was challenged in the courts and Harper asked the Supreme Court of Canada for a referral on the bill. On April 25, 2014, the Supreme Court unanimously ruled that "the Senate is a core component of the federal structure of government" and that changes to the Senate would require provincial approval with attendant constitutional negotiations.⁶

The central pillar of Canadian foreign policy under Prime Minister Harper has been economic diplomacy with a focus on trade agreements and the promotion of energy exports. Since the launch of a Global Commerce Strategy in 2007, Canada has signed or concluded eight free trade agreements with 38 countries, most recently with the European Union (EU) in October 2013 and South Korea in March 2014.⁷ Building on this strategy, the Canadian government produced a new Global Markets Action Plan in 2013 to "ensure that all Government of Canada assets are harnessed to support the pursuit of commercial success by Canadian companies and investors in key foreign markets...."⁸ According to the Canadian government, international trade accounts for more than 60% of the country's gross domestic product (GDP) and one in five Canadian jobs.

Beyond the predominant theme of pragmatic economic diplomacy, analysts assert that Harper's foreign policy outlook is framed to a large extent by the promotion of democracy, human rights, and effective global governance.⁹ The case of Iran, for example, has been cited as demonstrating the limits of economic diplomacy as foreign policy. The Harper government, a particularly close and vocal supporter of Israel, has been highly critical of the Iranian government's repression of its own people and sponsorship of terrorism outside its borders, and skeptical of Iran's intentions in nuclear negotiations. Canada cut off diplomatic relations with Tehran in 2012 and has joined much of the international community in imposing extensive sanctions on Iran, commercial considerations notwithstanding.

The Harper government has also been strongly critical of Russia's actions in Ukraine, despite Canadian companies having approximately C$5 billion in Russian investments. In April and May 2014, Canada deployed military personnel and assets to support NATO "reassurance measures" in Central and Eastern Europe, including a task force of six CF-18 fighter aircraft and support personnel to Romania, the frigate HMCS Regina to the Mediterranean region, 50 troops to airborne infantry exercises in Poland, and 15 operational planning staff to Supreme Headquarters Allied Powers Europe (SHAPE) in Belgium.¹⁰ The Canadian government has not taken a formal position on debates about establishing a permanent NATO troop presence in Central and Eastern Europe, although at least one Conservative Member of Parliament has publicly suggested that Canada could play a role in any such permanent mission.¹¹ The topic of Ukraine carries additional domestic weight in Canada because there are approximately 1.2 million Canadians of Ukrainian descent.

Canada was one of the first countries to join the U.S. military operation in Afghanistan in 2001. For much of the period 2006 to 2011, there were approximately 2,800 Canadian troops deployed in the NATO-led International Security Assistance Force (ISAF), the fifth-largest national contingent in ISAF. Many Canadian troops served on the front line in combat operations against al-Qaeda and Taliban fighters, and 158 Canadians have been killed in Afghanistan. Canada ended its combat role in Afghanistan in 2011, but a contingent of approximately 950 troops remained until March 2014 to help train Afghan national security forces. Canadian forces also participated in the 2011 NATO mission in Libya, several international missions in Haiti over the past decade, and the earlier NATO-led Stabilization Force (SFOR) in Bosnia-Herzegovina.

According to Canada's Foreign Affairs Ministry, "Canada's priority for NATO is to ensure that the Alliance remains modern, flexible and agile and thus able to face the threats of today and those arising in the future. This goal drives all of Canada's efforts on NATO transformation, reform and partnerships with non-NATO countries."¹² IHS Jane's asserts, "it is clear that the Harper government sees Canada's role in NATO as central to its foreign and security policy."¹³

The Harper government has been notably seeking to assert Canada's sovereignty in the Arctic region, maintaining and expanding the "Northern Strategy" launched by his Liberal predecessors. The most visible part of this policy has been the establishment of a stronger military presence, including plans for the construction of 6-8 armed icebreakers to patrol the north. Scientists have forecast that in coming decades, global warming will reduce the Arctic ice pack in Canada's northern archipelago sufficiently to create a "northwest passage" permitting ships to traverse the region during the summer months. The prospect of such traffic raises a host of political, legal, environmental, security, and commercial issues, chief among them the question of jurisdiction. (see "Canada's Arctic Sovereignty Claim" section).

Observers of Canadian foreign policy additionally note that Prime Minister Harper has been more selective in contrast to his predecessors' emphasis on wide-ranging multilateralism as a means of leveraging Canadian influence. He has, for instance, participated actively in forums such as the G7 and G20, but demonstrated less enthusiasm for the United Nations and withdrew Canada from the Kyoto Protocol on climate change in 2011. By all accounts, the Harper government has also downgraded Canada's long-standing historical emphasis on participation in international peacekeeping operations, although over 650 Canadian troops are deployed abroad in a range of U.N., NATO, and other multilateral missions.¹⁴

For a variety of practical and historical reasons, Canada's relations with the United States have always been a key priority. The two countries share a 5,500-mile border, broadly compatible values, and cultural similarities, as well as vital interests in the international realm. Trade between the two countries well exceeds $1 billion per day; however, Canada's dependence on exports to the United States has prompted several governments to attempt to expand and diversify its international commerce. Canada's efforts to promote U.S. approval of the Keystone XL pipeline have been a central element of Canadian foreign policy in recent years (see "Keystone XL Pipeline" section).

According to the U.S. State Department, "U.S. defense arrangements with Canada are more extensive than with any other country."¹⁵ There are over 80 U.S.-Canada defense treaties or agreements and an additional 250 bilateral memoranda of understanding pertaining to defense issues.¹⁶ Close U.S.-Canadian defense cooperation has been long-standing. In 1940, President Franklin D. Roosevelt and Prime Minister Mackenzie King established the Permanent Joint Board on Defense, which formalized bilateral consultation on military matters and is still in operation. The two countries were founding members of NATO in 1949, and signed the North American Aerospace Defense Command (NORAD) agreement in 1958. The continental air defense pact monitors U.S. and Canadian airspace and encourages joint efforts in aerospace technologies.

In 2004, Canada and the United States amended NORAD to permit it to share warning information on incoming ballistic missiles with the U.S. missile defense system. In 2006, the two countries expanded the scope of NORAD's activities to encompass nautical surveillance. In 2008, Canada and the United States signed a Civil Assistance Plan allowing the armed forces of each country to assist one another in the event of civil emergencies such as floods, earthquakes, or the effects of a terrorist attack. U.S. and Canadian officials and military commanders have been examining ways to modernize NORAD's surveillance capabilities and expand its role in monitoring Arctic waters in the expectation that ice melt and commercial development in the Arctic are likely to lead to increased activity in the High North region.¹⁷

Canada long debated whether it should participate in the U.S. ballistic missile defense (BMD) system before deciding against it in 2005 in the face of domestic political opposition and concerns that the system could trigger a new arms race or lead to the militarization of space. Canada does not therefore participate in the operation of the U.S. BMD system, but Canadian forces play a supporting role because of the agreement that NORAD is to share information with U.S. BMD commands. The U.S. expansion of the BMD system, however, has raised concerns that NORAD's early warning mission may become increasingly redundant.¹⁸ Analysts and former officials have been calling for the Harper government to re-visit the issue of BMD, and defense committees in both the Canadian Senate and House of Commons have been examining the issue.¹⁹ Proponents argue that by signing off on NATO's 2010 Strategic Concept and other NATO documents, Canada has already embraced BMD as a means of protecting allied countries. They furthermore assert that the incongruities of the relationship between NORAD and the BMD system are irrational and threaten to undermine the wider relevance of NORAD.

The Canada First Defense Strategy released in 2008 defines the three central roles of the Canadian Armed Forces as defending Canada; defending North America (with the United States), and contributing to international peace and security.²⁰ As demonstrated during sustained combat operations in Afghanistan, Canadian forces are capable of deploying on demanding out-of-area missions for an extended period of time. Analysts observe in addition that Canadian forces demonstrated an ability to adapt to combat conditions in Afghanistan, including rapid procurement of needed equipment.²¹ In 2012, Canada completed a major transformation of its military command structure. The reforms combined the domestic and continental command, expeditionary command, and operations support command into a single Canadian Joint Operations Command (CJOC) responsible for all armed forces operations outside of NORAD and special forces.²²

Canada's defense spending has been flat or declining as a percentage of GDP since the 1990s. In 2013, Canadian defense expenditures were about C$19 billion, or only 1.0% of GDP.²³ NATO recommends that member states spend 2% of GDP on defense. The 2008 defense strategy launched a number of ambitious procurement initiatives, including new Arctic-capable patrol vessels, supply ships, and search and rescue aircraft, but these plans have been thrown into uncertainty after the 2014 federal budget deferred C$3.1 billion in planned capital spending over the 2014-2017 period to a later date.²⁴ Although the end of the Afghanistan mission has reduced defense costs, Canada has also achieved savings by reducing capabilities, including by eliminating some types of anti-air and anti-tank missiles and unilaterally halting its contribution to two NATO air surveillance programs.

The cuts also bring an additional element of uncertainty to Canada's potential acquisition of the F-35 Joint Strike Fighter. Canada agreed to participate in the F-35 program in 2002, and the government announced plans in 2010 to acquire 65 F-35s to replace the country's fleet of 78 CF-18s in 2017. Amid accusations that the government had misled the public about the cost and performance of the aircraft, the plans became politically controversial, however. In 2012, the Canadian government put the procurement process on hold in order to review the plans and potentially explore alternatives. The Canadian government is unlikely to decide on how to proceed until 2015, indicating it would not be in a position to purchase F-35s until 2018.

Skeptics question whether determined terrorists and criminals can reliably be prevented from traversing the two countries' 5,500-mile border. And efforts to strengthen border security must be balanced against competing pressures to facilitate legal travel and trade by preventing long delays at border crossings. About 80% of U.S.-Canada merchandise trade crosses the border by truck; and many of these shipments are "just-in-time" deliveries, so that crossing delays can seriously disrupt manufacturing in both countries.²⁷ International tourism is also a key export for both countries, and each represents the other's number one tourism market.²⁸ Thus, both sides have strong incentives to strengthen security, and to keep goods and travel flowing.

Particularly since the 9/11 attacks, Ottawa and Washington have taken numerous steps to improve border security, including through a series of bilateral agreements. In December 2001, they signed the Smart Border declaration that aimed at improving security and efficiency at border crossings. The agreement laid out a 30-point (since increased to 32-point) list of areas of joint activity covering air, land, and sea crossings, ranging from pre-clearance of goods and people, to biometric identifiers, to infrastructure improvements. In December 2002, the two nations signed the Safe Third Country agreement, intended to permit coordination of refugee and asylum policy. The two countries also cooperate extensively on law-enforcement activities around the border.

In February 2011, President Obama and Prime Minister Harper signed the Beyond the Border declaration, which described their shared visions for a common approach to perimeter security and economic competitiveness. The 2011 agreement focuses on information sharing and joint threat assessments to develop a common and early understanding of the threat environment; infrastructure investment to accommodate continued growth in legal commercial and passenger traffic; integrated cross-border law enforcement operations; and integrated steps to strengthen shared cyber-infrastructure.

This vision was fleshed out by the Beyond the Border Action Plan, released during a meeting of the two leaders on December 7, 2011. It set out goals and progress metrics related to

• harmonized cargo screening under the "cleared-once, accepted twice" principle,
• joint inventories and gap analysis related to travel and trade threat assessments and border surveillance,
• automated biographic and biometric data sharing,
• an integrated entry-exit system,
• enhanced pre-clearance of goods and travelers, and
• expansion of interoperability among law enforcement and deployment of cross-designated personnel.²⁹

Joint border-area law enforcement programs consist primarily of Integrated Border Enforcement Teams (IBETs) and the Shiprider Program. The IBETs are binational, multi-agency, intelligence-led enforcement teams focused on identifying, investigating, and interdicting common national security threats and criminal activity at 24 locations at and between U.S.-Canadian ports of entry. The Shiprider program allows fully cross-trained and cross-designated agents from each country to conduct joint enforcement exercises along shared international waterways.

In addition to these programs, Canada's customs service has stepped up the purchase of high-tech X-ray equipment, and U.S. and Canadian customs agents are working together to inspect containers at several Canadian and U.S. seaports. Canada also has set up an Air Transport Security Authority, which, among other activities, is responsible for pre-board screening. In 2004, the Canadian government created a Department of Public Safety and Emergency Preparedness, a counterpart to the U.S. DHS, and a Border Services Agency.

Away from the border, Canada has taken related actions, including freezing terrorists' assets, broadening the scope of terrorist activities punishable by law, extending police investigative powers, introducing legislation that would put restraints on fund-raising activities by extremist organizations, expanding cooperation between the FBI and the RCMP, and increasing outlays for countering nuclear, biological, and chemical weapons attacks.³¹ Canadian police and security officials arrested 18 individuals on terrorism-related charges in June 2006 (the so-called Toronto 18) and 6 men in another terrorism-related incident in August 2010 (a sting operation known as Project Samosa). These incidents did not emerge as major domestic political issues within Canada, but they renewed debate within the United States about Canada's immigration practices, its commitment to a multicultural environment, its security measures, and the presence of its troops in Afghanistan.

The Canadian economy experienced a shallower recession and initially recovered faster from the 2008 global economic crisis than the United States, but growth in both countries remains sluggish. In 2013, both economies grew at similar rates: 2.0% in Canada and 1.9% in the United States. In 2014, Economist Intelligence Unit and IHS Global Insight forecasters expect Canada's GDP to grow by 2.2% and 2.3%, respectively, and for U.S. GDP to achieve growth of 2.5% and 2.4%.³²

Canada's economy began to grow again in 2010 following the global financial crisis of 2008. However, GDP has been slowing from the robust level of 3.4% in 2010 to an estimated 2.0% in 2013. Several factors likely contributed to this slow growth, including the end to the boom in commodities on which Canada's economy disproportionately depends; the sluggishness of the U.S. economy; and the retrenchment of government spending. Growth has been dependent on personal consumption, especially in the still-buoyant housing sector, but business investment and export growth remain elusive. The unemployment rate, which hit a generational low of 5.8% in January 2008, peaked at 8.7% in August 2009, and gradually fell back to 6.9% by April 2014.

After racking up 27 straight years of deficit spending prior to the "austerity" budget of 1995, Canada's public debt reached a peak of 101.6% of GDP, and government sector spending reached 53.6% of GDP in 1993. Realizing this course was unsustainable, the Liberal government of then-Prime Minister Jean Chrétien and his Finance Minister Paul Martin embarked on a financial austerity plan in 1995 using such politically risky measures as cutting federal funding for health and education transfers, applying a means test to those eligible for Seniors Benefits, and cuts in defense. Modest tax increases were also employed, mostly through closing loopholes. Under this budget discipline, the government submitted a balanced budget in 1998 and a political consensus emerged not to resort to deficit spending, at least until 2009. That year, faced with the fallout of the global financial crisis, the Conservative government of Prime Minister Stephen Harper introduced a budget which financed a package of stimulus spending and tax cuts, but which also reintroduced deficit spending to the Canadian polity. Since then, government policy has been one of retrenchment, with the aim of returning the budget to balance with an C$800 million surplus forecast by 2015, coincidentally an election year.

In contrast to the United States, the Bank of Canada (BOC) raised interest rates three times—to a 1% target rate—to constrain demand—until September 2010. This accommodative stance has been made possible by the virtual absence of inflation, but it has also contributed to a housing boom and personal consumption boom that is just beginning to decelerate. This, in turn, has led to record Canadian household indebtedness with the debt-to-disposable income ratio reaching 165.6% in 2013. Yet, the BOC is reluctant to raise interest rates and risk increasing debt-service costs to the consumer and slowing consumer spending. The Bank's 1% interest rate has also helped the Canadian dollar (loonie) maintain its value near parity, although the value of the loonie has been dropping against the U.S. dollar throughout 2013 and into 2014, falling from slightly over parity with U.S. dollar at the beginning of 2013 to 1.08/US$ on June 1, 2014.

Canada is the United States' largest supplier of energy—including oil, uranium, natural gas, and electricity—and, until recently, the energy relationship has been growing.³³ Canada is the world's fifth-largest petroleum producer, and its reserves are believed to be the third largest in the world only after those of Saudi Arabia and Venezuela; Canada's sources of oil include traditional and offshore wells and, increasingly, Alberta's oil sands.³⁴ In 2013, the value of U.S. petroleum and natural gas imports from Canada reached $109.1 billion, up from $65.2 billion in 2009. This figure largely represents increases in the value and quantity of crude oil exports from Canada. However, due to the domestic shale gas boom, Canada's exports of natural gas have been dropping since 2010. Canada provides 38% of U.S. crude oil imports (up from 22% in 2009) and supplies 41.4% of U.S. natural gas imports (down from 82.6% in 2009).³⁵ Canada also is a net exporter of electricity to the United States, and the North American electricity grid is closely interconnected. Canada is particularly valued because it is considered a reliable source of energy, as it is not a member of OPEC. However, the main new pipeline project to bring Canadian oil to the United States—the Keystone XL—remains stymied, with the State Department yet to make a determination as to whether it may proceed (see "Keystone XL Pipeline," below). China has shown interest in Canada's oil sector, and has recently bought stakes in Alberta's oil sands projects. Partly as a result of the Keystone XL impasse, the Canadian federal government has been advocating the construction of a pipeline through British Columbia to export oil to Asia. Like the Keystone XL, this route has drawn opposition from environmentalists, but also from First Nations tribes, over whose land much of the pipeline would be constructed.

The United States and Canada enjoy the largest bilateral commercial relationship in the world. Over the past 20 years, U.S.-Canada trade relations have been governed first by the 1989 U.S.-Canada Free Trade Agreement and, subsequently, by the 1994 North American Free Trade Agreement. These agreements, along with the conclusion of the Uruguay Round of multilateral trade negotiations and the creation of the World Trade Organization, contained mutual concessions on commercial trade and investment barriers, and, more importantly perhaps, established binding dispute settlement mechanisms. While these agreements have resolved some of the sharp differences from the past, questions regarding the effectiveness of dispute resolution mechanisms remain. In addition, both nations are fully engaged in negotiating preferential trade agreements, together in the Trans-Pacific Partnership negotiations, and separately with the European Union.

The volume of economic activity across the border underscores the extent of economic integration between the United States and Canada. The two nations continue to have the largest trading relationship in the world, with $1.6 billion per day in goods crossing the border in 2013. In that year, Canada purchased 18.3% of U.S. exports and supplied 15.1% of all U.S. imports. The United States supplied 52.1% of Canada's imports of goods that year and purchased 74.5% of Canada's merchandise exports; two-way trade with the United States represented nearly 34.0% of Canadian GDP. While the United States recorded a goods trade deficit with Canada of $81.2 billion in 2013, the United States would have registered a trade surplus without Canadian imports of crude oil.

Meanwhile, several trade issues—some old, some new—have yet to be completely resolved. Many of these disputes involve long-running disputes over agricultural commodities or natural resources, including softwood lumber and farm goods. Some analysts attribute the longevity of these conflicts to the inherent incompatibility of the two countries' different natural resource and agricultural programs, others to the political sensitivity of the commodities under negotiation.

Softwood Lumber

Trade in softwood lumber traditionally has been one of the most controversial topics in the U.S.-Canada trading relationship. Currently, trade in softwood lumber is governed by a seven-year agreement (SLA)—reached in 2006 and since extended for two years to 2015—restricting Canadian exports to the United States. After a prior agreement expired in March 2001, the U.S. Commerce Department launched countervailing duty and anti-dumping investigations; in May 2002, the International Trade Commission (ITC) found that Canadian imports threatened to injure U.S. industry, and Commerce applied 27% (later reduced) duties on Canadian softwood. Canada challenged the agency decisions under NAFTA and in the WTO.

After several years of inconclusive and sometimes conflicting litigation, the current agreement was reached. As part of a complicated formula, the United States will allow unlimited imports of Canadian timber when market prices remain above a specified level; when prices fall below that level, Canada will impose export taxes and/or quotas. In addition, the United States will return to Canada a large majority of the duties it had collected.³⁶

The implementation of the softwood lumber agreement has not been without controversy. As the depressed housing market has reduced demand for softwood lumber, the market price has been under the level ($355 thousand board feet) at which export taxes must be charged. The United States and Canada resorted to arbitration over the use of adjustment mechanisms to calculate the quotas used for eastern Canadian lumber. The arbitral panel sided with the United States, and after Canada did not implement the panel's recommendation, the United States levied a 10% tariff on the affected lumber to recoup the compensation awarded by the arbitral panel in April 2009.

The Obama Administration sought arbitration under the SLA over timber grading practices in British Columbia (BC). The U.S. government claims that the BC government changed its classification procedures for timber and has been grading an increasing amount of its cut as salvage Grade 4 lumber. For its part, Canada attributes this increase to an infestation of mountain pine beetles and rejects the assertion that this policy represents a subsidy for Canadian producers. An arbitral panel dismissed the U.S. claim in July 2012.

In January 2008, the United States also requested arbitration over six provincial forest sector assistance programs in Québec and Ontario, programs that the United States believes contravene the anti-circumvention provision of the SLA. In January 2011, the LCIA found certain of these programs breached the SLA, and Canada began imposing additional charges on lumber from Quebec and Ontario for the duration of the agreement. A separate LCIA tribunal released a finding in March 2014 that Canada no longer had to collect these duties after October 2013, the original expiration date of the SLA. The 2014 USTR Annual Report notes that "we will develop a strategy to foster fair trade in the North American lumber market in the lead-up to the expiration of the U.S.-Canada Softwood Lumber Agreement in 2015," although it did not go into details.³⁷

Country of Origin Labeling

Buy American Provisions

Intellectual Property Rights

In May 2013, Canada assumed the two-year revolving chairmanship of the Arctic Council. Created in 1996, the Arctic Council has become the primary intergovernmental "high level forum" for cooperation in the Arctic region. It addresses a wide range of issues, including regional development, the environment, emergency response, climate change, and natural resource extraction. The Council membership consists of the eight countries that have sovereign territory within the Arctic Circle: the United States, Canada, Norway, Denmark (by virtue of its territory Greenland), Russia, Sweden, Finland, and Iceland. Only these countries have voting rights. Six indigenous Arctic peoples' organizations are permanent participants. Permanent observer status is held by France, Germany, the Netherlands, Poland, Spain, the UK, China, India, Italy, Japan, South Korea, and Singapore; the latter six were added during the May 2013 summit meeting. Also represented on the Council are several intergovernmental and nongovernmental observers, including the International Red Cross, the United Nations Development Program, the Nordic Council, and the Worldwide Fund for Nature.

The United States takes over the chairmanship of the Arctic Council in 2015. Although there has been no apparent formal coordination of the back-to-back North American chairmanships, likely U.S. priorities are expected to be broadly similar to those of the Canadian program: maritime safety, including enhancement of codes and guidelines for shipping as well as search and rescue capabilities; environmentally responsible resource development; and supporting sustainable communities and economic development for the 4 million people who live in the Arctic region; as well as advancing scientific research.

U.S. strategic priorities in the Arctic have been further developed with a 2013 National Strategy for the Arctic Region that augments the Bush Administration directive and identifies three major "lines of effort": (1) Advancing United States security interests; (2) Pursuing responsible Arctic region stewardship; and (3) Strengthening international cooperation.⁴⁶ After a subsequent January 2014 Implementation Plan calling for the U.S. chairmanship to develop a "robust agenda," however, Alaska Senator Lisa Murkowski sent a letter to President Obama stating she was "severely disappointed ... that the plan did not offer a vision to make the United States a leader in the Arctic."⁴⁷ At the request of Alaska Senators Murkowski and Mark Begich, Secretary of State John Kerry announced in February 2014 that he would appoint a high-level Special Representative for the Arctic Region to signal growing U.S. interest in the area. Senator Begich has also introduced legislation in the 113^th Congress to establish a U.S. Ambassador-at-large for Arctic Affairs (S. 270). A parallel bill in the House of Representatives (H.R. 4538) stipulates that the appointee will serve as the chair of the Arctic Council for the U.S. chairmanship of 2015-2017.

1. Several governments have taken issue with Canada's assertion of sovereignty over the Arctic waters. Do any foreign countries support Canada on this question? Has the Canadian government offered a legal precedent for its claim?

2. If Canada were to win recognition of its sovereignty over the passage, how might it regulate shipping traffic through the straits?

3. What might be the security, economic, and environmental consequences for the United States if Canada were to win its sovereignty claim? If the passage were to be declared international waters?

4. In May 2013, Canada assumed the rotating, two-year chairmanship of the Arctic Council. Does the Harper government intend to use this position to assert its claim of sovereignty over the Northwest Passage?

5. Please discuss examples of bilateral scientific and security-related cooperation between Canada and the United States in the High North.

U.S.-Canadian border security has emerged as an area of public concern, particularly since the 9/11 terrorist attacks. The United States and Canada attempt to balance adequate border security with the facilitation of legitimate cross-border travel and commerce. Generally, the countries have worked to strike this balance collaboratively, through a series of agreements governing bilateral border issues; and they continue to work together on core border issues including the management of border flows and travel documents, joint law enforcement, and a new integrated entry-exit system. Within the United States, some people remain concerned about the potential for terrorists and criminals to exploit the border and about the adequacy of infrastructure and personnel at the U.S.-Canadian border and ports of entry.

The U.S.-Canadian border between Washington State and Maine spans about 4,000 miles, includes vastly different types of terrain, and is the site of about 150 ports of entry, including 20 major land ports. (The border between Canada and Alaska spans an additional 1,500 miles.) According to the U.S. Bureau of Transportation Statistics, in 2012, northern border ports admitted about 5.6 million trucks, 28,500 trains, 108,000 busses, and 33 million passenger vehicles—numbers which exceed analogous data for the U.S.-Mexican border for trucks and trains, while passenger traffic is higher on the southern border.

Western Hemisphere Travel Initiative

Border Management

Joint Law Enforcement

The FY2014 appropriations for the Department of Homeland Security (Division F of P.L. 113-76) included $256 million to increase CBP officers at ports of entry by no fewer than 2,000 by the end of FY2015. It isn't yet clear what the allocation will be for northern ports of entry.

On March 11, 2014, Canada and South Korea announced the conclusion of an FTA during a visit by Prime Minister Harper to South Korea. This agreement, if implemented, will eliminate 98.2% of tariff lines between the two countries, and 86.8% of agricultural tariff lines, many with phase-out periods. Canada's supply management system for dairy, poultry, or eggs is not affected by the agreement with no additional Korean access for these products. Some in the automobile sector have criticized the agreement due to its immediate elimination of some of Canada's tariffs on autos and auto parts as well as familiar complaints about the closed nature of the Korean auto market. Canada did obtain a special rules-of-origin for vehicles, allowing for parts produced in the United States to be installed in Canadian vehicles and still qualify for tariff-free treatment.⁵⁰

Comprehensive Economic and Trade Agreement

After nearly 4½ years, Canada and the European Union (EU) announced an agreement in principle to a Comprehensive Economic and Trade Agreement (CETA) on October 18, 2013. It is Canada's most ambitious proposed trade agreement since NAFTA, and it has raised issues of concern to countries at a similar level of development and with relatively low tariffs. The results of these negotiations could presage the Trans-Atlantic Trade and Investment Partnership (TTIP) talks between the United States and the European Union. The agreement is expected to be ratified by 2015. While the final text is still being prepared, provisions of the agreement include:

• Full elimination of nonagricultural tariffs with transition periods for autos and ships (Canada).
• Cumulation of rules-of-origin for autos to reflect integrated nature of North American auto market. Both sides agree to work for greater harmonization of auto standards.
• Agriculture tariffs to be largely eliminated after transition periods; 92.8% of Canadian agriculture tariffs lines and 93.5% of EU agriculture tariff lines will be eliminated. Additional tariff-rate quotas (TRQ) would be available for certain agriculture products: a TRQ of 17,000 metric tons for high quality EU cheese in Canada; a TRQ of 50,000 metric tons of nongrowth hormone Canadian beef in EU.
• No additional EU market access in the Canadian supply-managed dairy or poultry sectors.
• Canada to adopt protections known as geographical indications to a list of agricultural products with the possibility of adding other names to the list in the future.
• Broad coverage across all sectors for services market access.
• Coverage of temporary movement of professionals and intra-corporate transferees and mutual recognition of professional qualifications.
• Government procurement: each side has granted the other the most favorable and comprehensive market access of its respective FTAs.
• Canada agreed to measures to strengthen its intellectual property regime for pharmaceuticals.
• Investor-state dispute mechanism available to investors from both parties. Provisions to insure transparency and to allow for early dismissal of frivolous claims.

The Conservative government's enthusiasm for negotiating FTAs was well expressed by then-International Trade Minister Peter Van Loan back in April 23, 2010. Canada is pursuing FTAs "with a vigor right now because we're a trading country, our businesses need it, our workers need it, our prosperity depends on it, so we're going to make it happen for Canada and not simply depend on the WTO." While in some ways this policy resembles the "competitive liberalization" policy undertaken by the George W. Bush Administration, it remains to be seen whether agreements resulting from such negotiations will increase trade flows and lessen the dependence of Canada on the U.S. market. It also remains to be seen whether Canada will retain its traditional engagement in the WTO.

1. How controversial is the Harper government's trade policy? Does the public approve of further trade liberalization? How does the continuing decline of the Canadian manufacturing sector affect public attitudes towards free trade generally?

2. Do you think the emphasis on negotiating bilateral and regional FTAs complements or weakens the multilateral trading system? Does this policy reflect a lack of confidence in the ability to conclude the WTO Doha Round, or that Canada will not benefit much from a Doha agreement?

3. What is Canada seeking to achieve in the TPP negotiations? Now that Japan has joined the TPP, are bilateral FTA talks between Canada and Japan still relevant? Would joining the TPP advance the objective, promoted by successive Canadian governments, of expanding Canada's role in the Asia-Pacific region?

4. How is the Canada-South Korea FTA being perceived in Canada? Did Canada get a better or worse deal than the United States? What are the implications if South Korea potentially joins the TPP?

5. Canada and the European Union have announced a Comprehensive Economic and Trade Agreement. What aspects of the agreement are particularly favorable to Canada? In what areas would Canada have to undertake additional commitments? Should Canada and Mexico be a part of the TTIP agreement given the integrated nature of the North American economy?

How can the United States improve cooperation with its North American neighbors on issues related to economic competitiveness, trade, transportation, and security? How are the United States, Canada, and Mexico currently cooperating on improving industry competitiveness, promoting economic growth, and enhancing security in North America? Should the three countries focus more on trilateral cooperation or are separate, bilateral cooperation efforts with Canada and Mexico potentially more effective due to the different issues facing each country?

The United States, Canada, and Mexico have been partners in the North American Free Trade Agreement (NAFTA) since 1994 and benefit from a broad and expanding trade relationship. Since 2005, the three countries have also made efforts to increase cooperation on economic and security issues through various endeavors, most notably by participating in trilateral summits known as the North American Leaders' Summits. The first North American Leaders' Summit took place on March 23, 2005, in Waco, Texas, and has been followed by numerous trilateral summits in Mexico, Canada, and the United States. A notable outcome of the first summit was the agreement among all three countries to cooperate more closely on increasing security and enhancing prosperity in North America. The most recent summit took place on February 19, 2014, in Toluca, Mexico, with an agenda focused on immigration, energy, and commerce. Current bilateral efforts pursed by the Obama Administration with Canada and Mexico have built upon the accomplishments of the working groups formed under the former Security and Prosperity Partnership of North America (SPP) established in 2005. Proponents of North American competitiveness and security cooperation view the initiatives as constructive to addressing issues of mutual interest and benefit for all three countries. Some critics of the most recent summit contend that the agenda did not include human rights issues or discussions on the drug-related violence in Mexico.

Trilateral Cooperation

During the most recent summit in February 2014 in Mexico, President Barack Obama, Canadian Prime Minister Stephen Harper, and Mexican President Enrique Peña Nieto announced initiatives regarding the economic prosperity of the region; education initiatives; energy and climate change; citizen security; and regional, global, and stakeholder outreach.⁵² The leaders discussed numerous economic and security initiatives for North America in the 21st century with the goal of setting new global standards for trade, education, sustainable growth, and innovation. In the areas of economic cooperation, discussions included developing a North American Transportation Plan; streamlining procedures and harmonizing customs data requirements; facilitating the movement of people through the establishment in 2014 of a North American Trusted Traveler Program, which will recognize and build upon existing programs; promoting trilateral exchanges on logistics corridors and regional development; and continuing prior initiatives such as protecting and enforcing intellectual property rights. In energy cooperation, the leaders continued their commitment to developing and securing affordable, clean, and reliable energy supplies to help drive economic growth and support sustainable development. The leaders committed to continuing cooperation on climate change and environmental cooperation; security; and effective information exchanges and coordination among law-enforcement authorities to counter drug trafficking, arms trafficking, money laundering, and other illicit activities. The three governments also stated that they share a commitment to combating human trafficking in all its forms and agreed to work toward improving services for the victims of this crime.⁵³

Most efforts to increase cooperation, either through trilateral or bilateral endeavors, generally have followed the recommendations of special working groups created after the first North American Leaders' Summit. These recommendations included (1) increasing the competitiveness of North American businesses and economies through more compatible regulations; (2) making borders smarter and more secure by coordinating long-term infrastructure plans, enhancing services, and reducing bottlenecks and congestion at major border crossings; (3) strengthening energy security and protecting the environment by developing a framework for harmonization of energy efficiency standards and sharing technical information; (4) improving access to safe food and health and consumer products by increasing cooperation and information sharing on the safety of food and products; and (5) improving the North American response to emergencies by updating bilateral agreements to enable government authorities from the three countries to help each other more quickly and efficiently during times of crisis.

Bilateral Cooperation

The Obama Administration has engaged in bilateral efforts, both with Canada and Mexico, to increase regulatory cooperation, enhance border security, promote economic competitiveness, and pursue energy integration. For example, in February 2011, President Obama and Canadian Prime Minister Harper announced the Beyond the Border Action Plan: A Shared Vision for Perimeter Security and Economic Competitiveness declaration, establishing a new long-term partnership to address threats within, at, and away from the U.S.-Canada border, while expediting lawful trade and travel.⁵⁴ The two governments also created a U.S.-Canada Regulatory Cooperation Council to improve alignment of regulatory approaches.

On September 20, 2013, the United States and Mexico launched the U.S.-Mexico High Level Economic Dialogue (HLED) to advance economic and commercial priorities through annual meetings at the cabinet level that also include leaders from the public and private sectors.⁵⁵ Other bilateral efforts with Mexico include the High-Level Regulatory Cooperation Council (HLRCC) launched in February 2012 to help align regulatory principles, an effort similar to the U.S.-Canada Regulatory Cooperation Council. In addition, the two countries have a bilateral initiative for border management under the Declaration Concerning Twenty-first Center Border Management that was announced in 2010.

The United States, Canada, and Mexico have made progress in recent years in addressing issues related to North American competitiveness and security. The Obama Administration has affirmed its commitment to continue past efforts on North American cooperation and build upon the work accomplished under previous frameworks. The North American Leaders' Summits have served as a mechanism to increase cooperation among North American trading partners on issues of mutual interest, but because there are no binding agreements, their role in improving prosperity and security has been limited.

1. How effectively has the United States pursued North American cooperation in the border initiatives with Canada and Mexico or in the regulatory initiatives? What other steps can be taken by the three countries to improve competitiveness of industries in the region? Are bilateral initiatives more effective than trilateral initiatives?

2. How successful has North American cooperation been in improving safety, security, and the flow of goods and services among NAFTA partners? What have been the actual results of the numerous initiatives launched? To what extent has the emphasis on border security caused delays in border crossings or transportation of merchandise? How have recent efforts to facilitate trade affected the trade relationship?

Canadian banks on the whole weathered the 2008-2009 financial crisis better than banks in the United States and Europe. Nevertheless, Canada's financial system was buffeted by the financial crisis as equity and housing prices fell and as economic growth slowed as a result of the downturn in global trade. Canada's economy is also feeling the effects of the European sovereign debt crisis, slow growth in export markets, and household indebtedness. Are there lessons to be learned from Canada's banking system, which has proven to be somewhat more immune to the financial troubles that have brought down better-known banks?

Canada's financial system proved to be more resistant to the failures and bailouts that marked systems in the United States and Europe. No Canadian financial institution failed or required public capital injections, although the financial crisis and global economic recession battered the Canadian economy in ways that are similar to those in the United States and in Europe. Recent stress tests indicate that Canada's major financial institutions would continue to be resilient to credit, liquidity, and contagion risks associated with a severe risk scenario. According to the International Monetary Fund (IMF), the Canadian economy contracted by -2.5% in 2009, before rebounding to a positive growth rate of 3.0% in 2010. Canada's economy grew by 1.7% in 2013, and is projected to grow by 2.2% in 2014. The vast economic and financial linkages between Canada and the United States mean that Canada is affected by the performance of the U.S. economy.

Much of Canada's economic recovery is attributed to low interest rates and a $33 billion fiscal stimulus package—one of the largest among advanced economies—over two years in infrastructure spending, tax decreases, worker retraining, housing, and aid to struggling industries. In addition, the federal government pumped additional liquidity into the economy by purchasing insured mortgages. In April 2009, the Bank of Canada lowered the nation's key interest rate to 0.25%. A drop in commodity prices caused the Canadian dollar to fall relative to the U.S. dollar, which improved the cost competitive position of Canada's exports. In relative terms, Canada's fiscal outlook is among the best in the G-20.

According to the Bank of Canada, major risks to Canada's economic recovery during the near term are (1) global sovereign debt issues associated with some European countries, fragmented financial systems in Europe, and weaker than expected growth in Europe potentially could raise borrowing costs for Canadian banks; (2) weak global demand that dampens global economic recovery and prolongs the financial system's vulnerability; (3) the low interest rate environment that can lead to distortions in financial markets as investors search for high-yielding assets and assume greater risk; and (4) high levels of indebtedness among Canadian households that leave them vulnerable to economic and financial shocks. Although Canadian banks are not highly exposed to public or private entities in Greece, Italy, Spain, or Portugal, Canadian banks are exposed to banks in Europe and the United States that are themselves highly exposed to the four countries. This high level of financial linkages could amplify shocks throughout the global financial system.

In recent years, Canadian banks have increased their ability to withstand adverse shocks by increasing the level and quality of their capital in line with the Basel III guidelines, and they have improved their liquidity management. Canadian banks are well capitalized, profitable, and have low rates of nonperforming loans. Despite these strengths, Canada's financial system would be affected by (1) weak global demand for exports that would tend to raise the rate of unemployment; and (2) an increase in the level of volatility in global financial markets and a decline in market confidence due to a slowdown in global economic growth that could result in higher funding costs for Canadian banks and higher costs for loans and tighter lending conditions in Canada.

In 2013, Canada implemented a number of reforms of the financial system, including:

• Implementing Basel III capital rules for banks and a capital surcharge for six systemically important banks;
• Establishing a credit-rating assessment group (CRAG) to reduce the Bank of Canada's (BOC's) reliance on external credit ratings by evaluating the credit risk of assets and other financial exposures that the BOC manages on behalf of the Canadian government;
• Establishing a central counterparty for corporate securities (repurchase agreements), which act as a major funding market for financial institutions, expanding the functions of the central counterparty, and adopting new international risk management standards for systemically important financial market infrastructures;
• Implementing a resolution and recovery framework for major banks;
• Adopting International Financial Reporting Standards (IFRS) and Auditing Standards for banks and life insurance companies;
• Strengthening oversight of the over-the-counter (OTC) derivatives market, moving to have all over-the-counter derivatives cleared through central counterparties, and having the largest provincial regulators harmonize rules for trade repositories and data reporting;
• Working toward adopting a single securities regulator to reduce compliance costs, simplify the monitoring of systemic risk, and facilitate coordination with other agencies and policy intervention; and
• Adopting various measures to tighten mortgage insurance.

The IMF has concluded that Canada's financial system is highly mature, sophisticated, and well-managed. In addition, the system is characterized by strong prudential regulation and supervision, stringent capital requirements, low risk tolerance, a well-designed system of deposit insurance and arrangements for crisis management and resolution of failed banks, a well-regulated and conservative mortgage market, and comprehensive mortgage insurance coverage. Supervisory responsibility for the financial sector in Canada is divided among the federal government, the provincial governments, and among a group of agencies within the federal government. The federal government is responsible for supervising all banks, federally incorporated insurance companies, trust and loan companies, cooperative credit associations, and federal pension plans. Provincial governments are responsible for supervising securities dealers, mutual fund and investment advisors, credit unions, and provincially incorporated trust, loan, and insurance companies. As a result, there are 13 regulatory authorities, each administering separate sets of securities laws and regulations.

Within the federal government, the Financial Institutions Supervisory Committee (FISC) acts as the chief coordinating body that sets regulatory policy and supervises financial institutions. The committee is comprised of the Department of Finance of the Ministry of Finance and four independent government agencies: the Office of the Superintendent of Financial Institutions (OSFI); the Bank of Canada; the Canada Deposit Insurance Corporation; and the Financial Consumer Agency of Canada (FCAC). All of these agencies report to the Minister of Finance, who is responsible to the Canadian Parliament. The Bank of Canada is responsible primarily for conducting monetary policy by setting interest rate targets and adjusting the supply of credit. The bank also serves as the key component in the payments system by providing a check clearing function, and it serves as the traditional lender of last resort. The Office of the Superintendent of Financial Institutions plays a key role in Canada's financial supervisory scheme by supervising all domestic banks, branches of foreign banks operating in Canada, trust and loan companies, cooperative credit companies, life insurance companies, and property and casualty insurance companies. One drawback to Canada's financial supervisory structure noted by the IMF is that no single entity in the system has the mandate for macroprudential oversight and the oversight committees do not have the membership to provide a comprehensive view of systemic risks across all financial institutions and markets in Canada. In particular, risks in securities markets are not systemically captured at the national level.

The financial system is dominated by six large banking groups (Royal Bank of Canada, the Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal, the Canadian Imperial Bank of Commerce, and the National Bank of Canada), which account for about 93% of total bank assets. The banks were identified as domestic systemically important banks in 2013, which means they will be subjected to higher capital requirements, enhanced supervision, and additional disclosure requirements. Foreign banks account for about 4% of total bank assets in Canada. The low representation by foreign banks is attributed to the "widely held" rule for large banks that limits the concentration of bank share ownership and, therefore, reduces the scope for mergers and for foreign entry through acquisition. Canada's financial legal framework has allowed Canadian banks to concentrate on their low-risk, profitable domestic retail banking activities (services provided to individuals, including deposits, savings accounts, mortgages, credit cards, etc.), leaving large domestic borrowers to conduct their wholesale banking activities (services provided to corporations, governments, and other entities) abroad. Canada's insurance sector is dominated by three large domestic groups, which account for over 80% of the assets in this sector. The securities sector is marked by large Canadian, as well as U.S. and UK securities firms.

Unlike the United States and some European countries, subprime mortgages account for less than 5% of Canadian mortgages, which sharply limited Canada's direct exposure to the meltdown that occurred in the subprime mortgage market. In addition, Canadian law requires that all bank-held mortgages above a loan-to-value ratio above 80% be insured, which has curtailed the securitization of mortgages by banks in Canada. In addition, prepayment penalties and the lack of interest deductibility reduce the demand for long-term mortgages, so the maturity of most mortgages does not exceed 5 to 10 years.

Canada's financial supervisory system and regulatory structure have proven to be less susceptible to the bank failures that have loomed in the United States and Europe. Nevertheless, Canada's approach has a number of drawbacks. Canada's system of regulating securities markets at the provincial level means that regulations regarding market participants and investor protection differ by province and that the nature, structure, and powers of the provincial regulators also vary. In addition, the conservative, risk-adverse approach employed by Canada's banks shielded the banks from some of the current financial turmoil; the approach also reduces efficiency in the market and reduces competition. Acquisition of Canadian banks is significantly impeded by the rule that bank stocks be widely held and mergers are effectively prohibited. With reduced competitiveness pressures, Canadian banks maintain low-risk balance sheets at the expense of greater innovation and more efficient capital allocation. This approach also means that financing for small firms and venture capital for potentially high-growth companies is sharply reduced. In concert with other advanced economies, Canada is moving to provide greater oversight of the over the counter (OTC) derivatives market by developing central counterparty services and a central clearing of standardized OTC derivatives contracts.

Since 2008, Canada has made notable progress in addressing the issue of money laundering and terrorist financing. In February 2014, the Financial Action Task Force (FATF) concluded that Canada's progress qualified it for removal from the annual follow-up process. Canada had been placed on the regular follow-up process in 2008 as a result of ratings it received from the FATF in its Mutual Evaluation Report of noncompliant or partially compliant in certain core and key Recommendations.⁵⁷ In applying to be removed from the regular follow-up process, Canada took a number of steps, including:

• Adapting the legal framework with key measures in the fields of Customer Due Diligence (CDD) through amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR), in particular with measures in relation to the circumstances in which customer due diligence has to take place, enhanced due diligence, and ongoing due diligence.
• Strengthening its Financial Intelligence Unit, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), with additional resources and by reinforcing its compliance program with a new range of administrative sanctions. Canada is also implementing a federal registration regime for money service businesses.
• Expanding the AML/CFT regime to additional Designated Non-Financial Business and Professions, in particular, British Columbia Notaries and dealers in precious metals and stones.

Canada's AML/ATF Regime was formally established in 2000 as the National Initiative to Combat Money Laundering (NICML), as part of the government's effort to combat money laundering. Legislation adopted in 2000, the Proceeds of Crime (Money Laundering) Act, created a mandatory reporting system for suspicious financial transactions, large cross-border currency transfers, and certain prescribed transactions. The legislation also established the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) to collect and analyze these financial transaction reports and to disclose pertinent information to law enforcement and intelligence agencies. In December 2001, the Proceeds of Crime (Money Laundering) Act was amended to include measures to fight terrorist financing activities and was renamed the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). Numerous Canadian agencies are involved in administering Canada's anti-money laundering/anti-terrorist financing (AMJL/AFT) regime, with the Departments of Finance and Justice providing oversight and playing the main coordinating roles.

1. Do the differences in the size and the scope of the U.S. and Canadian financial markets reduce the importance of the Canadian system as a model for the United States to potentially follow?

2. Are there aspects of Canada's federal supervision of its banking system that could serve as a model for bank supervision by the United States?

3. Canada's approach to financial supervision concentrates the majority of that responsibility in an authority that is separate from the central bank. Is this an approach that the United States should consider as it evaluates the effects of changes it has made to its own regulatory structure?

Both the United States and Canada rely on information technology as a strategic national asset⁵⁹ that reaps many economic and societal benefits. However, increasing reliance on Internet-based systems has created new sets of vulnerabilities. Theft of digitally stored information, either for military or economic competitive advantage, has long been an area of concern for both countries. Internet-based commerce systems fall victim to identity theft and exploitation, leading to fraudulent transactions that rob individuals and companies of millions of dollars. Credit card companies and banks, automated clearing house and market trading systems, have all been listed by the FBI as having seen dramatic increases in online attack. In addition, a computer-based attack on our shared critical infrastructures could have devastating consequences. An attack of this nature, from both a security and an economic standpoint, could not only result in the loss of data, but could also degrade or damage physical assets and could potentially lead to loss of life.

Background and Analysis

In 2007, sustained denial of service attacks on Estonia's critical infrastructure raised questions of whether a cyber-attack could be considered an act of war that could possibly trigger a military response. These questions were underscored in 2008 when a Russian military incursion into Georgia coincided with a series of coordinated attacks on Georgia's networked information systems. Both of these incidents highlighted a need for NATO to develop a framework for determining the alliance's treaty responsibilities towards a partner nation whose computer systems are under siege.

As tensions in Ukraine escalate, so have concerns that Russia may again use cyber tactics as part of a military campaign, either through use of proxy hacker groups, patriotic citizenry, or a state-sponsored operation.

In 2011, reports surfaced of foreign hackers traced to Russia using pilfered network data to gain remote control over a water plant in Illinois, causing the system to fail and forcing a shutdown. The same year saw one of the first known instances of malicious software that appeared to be specifically designed to target and degrade critical control systems. The Stuxnet worm was discovered to have been designed to cause malfunctions in the computer systems that controlled nuclear centrifuges in Iran. Unlike other types of cyber-attacks, which often use phishing techniques, malicious attachments, and exploitation of known software vulnerabilities to break into a network or implant a backdoor onto a computer, this malware was implanted on computers that were not connected to the Internet.

Recent discoveries of vulnerabilities in the computer systems that control many utilities delivery systems have been cause for alarm. Reports of probes, possibly state-sponsored, attempting to map the North American electrical grid are of particular concern to both the United States and Canada due to the interconnected, shared nature of bulk power critical infrastructure. In 2007, a U.S. Department of Energy test at Idaho Labs demonstrated the ability of a cyber-attack to shut down parts of the electrical grid. In the test, known as the Aurora Experiment, a cyber-attack on a replica of a power plant's generator caused it to self-destruct. As electrical systems become increasingly reliant on sophisticated information technology, such as with the more efficient "smart grid," many worry that security concerns have been left by the wayside.

Neither the United States nor Canada has yet experienced a cyber-attack on critical infrastructure that has risen to a level of a national crisis. However, many security experts warn of such a possibility as nation states and extra-territorial hacker networks appear to have an interest in developing a large-scale attack capability.

U.S.-Canada investment and cooperation in cyber defense is notable. In February 2014, the government of Canada launched a five-year, $1.5 million initiative to improve the security of its networks. The program was developed in support of Canada's overall Cyber Security Strategy. The United States and Canada have signed a Memorandum of Agreement on "Cooperation in Science and Technology for Critical Infrastructure Protection and Border Security and related Cooperative Activity arrangements." Both countries are signatories to the Council of Europe Convention on Cybercrime, a document intended to harmonize national laws on information security in order to create a broader set of international norms in cyberspace. While the United States has ratified the Convention, Canada has not. Neither China nor Russia, two countries from which many cyber threats appear to stem, are signatories to the Convention. The Council of Europe Convention defines cybercrime as a range of malicious activities that fall into four broad categories of computer-related crimes: (1) security breaches such as hacking, illegal data interception, and system interferences that compromise network integrity and availability; (2) fraud and forgery; (3) child pornography; and (4) copyright infringements. Although the United States is a state party, it has not necessarily followed the exact definitions; there may be areas where the United States and Canada have differing views on what constitutes cybercrime.

1. Given that a large portion of critical infrastructure is owned and operated by the private sector, both countries have recognized a need to cooperate not only on a bilateral level but to effectively share information and resources with relevant companies and stakeholders. How effective have these outreach programs been, and what are areas for improvement?

2. How can the United States and Canada work to improve resiliency in the event of an attack, and to cooperate with hardening potential targets and developing cybersecurity tools while still protecting trade secrets and intellectual property? How can we share cyber threat information while still complying with privacy and civil liberties laws in each country? What are some barriers to effective information sharing?

3. In addition to strengthening defenses and categorizing attack thresholds, the rise of nonstate actors operating in cyberspace and the difficulty of attributing attacks presents a significant challenge for the Alliance. How can the United States and Canada work within NATO to develop common standards for attributing attacks in order to formulate an appropriate response?

Canada uses supply management to support its dairy, poultry, and egg sectors. Its main features (1) provide price support to producers based on their production costs and return on equity and management, (2) limit production to meet domestic demand at the cost-determined price, and (3) restrict imports to protect against foreign competition. The Canadian government has supported producers' decisions to use this approach for more than 40 years, and succeeded in limiting imports of these products in negotiating the U.S.-Canada Free Trade Agreement, its multilateral commitments in the Uruguay Round's Agreement on Agriculture, and for the most part in its bilateral free trade agreements. Canada's interest in participating in the Trans-Pacific Partnership (TPP) trade negotiations has renewed calls from interest groups in the United States and New Zealand for Canada to open its borders to imports of these products. While Canadian dairy, poultry, and egg producers generally oppose trade liberalization, others argue that Canada should consider making concessions so that other Canadian economic sectors can benefit from export openings negotiated in the proposed TPP with the growing Asian economies.

According to the World Trade Organization, Canada in recent years has introduced an agricultural policy framework that includes a number of business risk management measures designed to partially compensate producers for revenue or income losses arising from low commodity prices, increased production costs, reduced production, or natural disasters. However, the supply management systems for dairy, poultry, and eggs "remain unchanged."

National bodies and provincial commodity marketing boards, granted statutory powers by the federal and provincial governments, control the supply management systems for these commodities. At the national level, the amount of each commodity that producers can market is controlled by a quota system. Imports of each commodity are limited by tariff rate quotas. These allow a specified amount to enter annually under Canada's trade commitments at little or zero duty, but apply a very high tariff on imports above the specified level or quota amount. Both tools work together to control the supply of each commodity, but the objective is to ensure that producers receive a price that guarantees them a return that covers their production costs. The quota is set to balance supply with demand at that price, and is frequently adjusted to ensure that this balance is achieved. Producers of these commodities must participate in their respective supply management systems, with farm-level production subject to individual quota limits that can only be sold into permitted marketing channels.

Supply management for dairy is divided into a nationally managed system for industrial milk (used to manufacture dairy products such as cheese and butter) and provincial-level systems for the marketing of fresh milk. The Canadian Milk Supply Management Committee (CMSMC) oversees the national system for industrial milk. It is chaired by the Canadian Dairy Commission (CDC), a federal agency that provides a framework for federal-provincial participation. The CMSMC determines the national domestic supply of industrial milk and allocates this volume among provinces.

The Farm Product Council of Canada (FPCC) oversees four national marketing agencies for poultry (chicken and turkey) and eggs that seek to balance the interests of stakeholders from producers to consumers. These agencies (Chicken Farmers of Canada, Turkey Farmers of Canada, Egg Farmers of Canada, and Canadian Hatching Egg Producers) are managed by representatives primarily from provincial commodity boards plus a few members representing processors and consumer associations. The provincial commodity boards regularly consult with their stakeholders to determine their poultry and egg needs. This information is used to set the national production level, which the agencies implement under a quota order that the FPCC must approve. Each provincial board allots its share of each quota to registered producers, and negotiates producer selling prices with processors.

Producers of these commodities point out the benefits of the supply management approach, which they say has significantly reduced price volatility. The stability of prices over time, combined with the guarantee that covers production costs, has served to provide income support. Others point out that these features have resulted in the lack of market orientation for these commodities, as the value of supply management has become capitalized, or incorporated, into the value of the quota. In other words, those who hold quota (i.e., renting it out) benefit more than the producers themselves. Public debate on the future of supply management has gained momentum in the last few years, but Canada's government remains steadfast in supporting this policy, which benefits the producers of these three commodities and those provinces in which they are concentrated.

In October 2012, Canada joined other countries already negotiating the TPP. Attention now is focused on how Canada's supply management systems for dairy, poultry, and eggs might be affected by the TPP and a trade agreement concluded with the European Union. Prime Minister Harper has continued to remain noncommittal on how supply management will be handled should TPP countries come closer to concluding an agreement. He has stated that Canada expects to negotiate and debate "all manner of issues" as a TPP participant, and that Canada will attempt to "promote and to defend [its] interests not just across the economy, but in the individual sectors as well." President Obama, when asked earlier whether Canada would have to drop supply management in order to join the TPP, reportedly only hinted in his response that Canada may have to make some adjustments in this area.

Though U.S. firms export dairy and poultry products to Canada, the import quotas in place under supply management have significantly limited access to this next-door market. Now that Canada is a TPP participant, the National Milk Producers Federation (NMPF), representing U.S. dairy farmers and dairy cooperatives, and the U.S. Dairy Export Council, representing this sector's export interests, want to secure complete free access for U.S. dairy exports into Canada, among other TPP objectives. Both groups also want to see U.S. negotiators tackle outstanding and proposed nontariff measures that have limited, and could limit, access for U.S. fluid milk and cheese in the Canadian market.

One sign of the pressures that Canada's TPP negotiators face is the negative reaction expressed by its dairy producers to the preferential access for specialty cheeses that Canada provided to the European Union (EU) in their free trade agreement concluded in October 2013. The Dairy Farmers of Canada stated it will not support this deal, claiming that subsidized cheese from the EU will displace domestic production of its fine artisan and local cheeses that the industry has worked hard to develop. Acknowledging that "minor compromises" were made that will affect the cheese sector, Harper stated his commitment to compensate producers for any losses and highlighted that his government "kept the principle and the basis of the supply management system." Earlier, an NMPF official commented that the cheese market access granted the EU "falls far short" of what U.S. dairy producers seek to obtain from Canada in the proposed TPP.

Canada's negotiators are monitoring the bilateral U.S.-Japan agricultural market access talks to gauge the pressures they may face if those talks achieve commercially significant openings for U.S. beef, pork, and dairy products in the Japanese market. To the degree that occurs could set benchmarks for what the major TPP agricultural exporters (United States, Australia and New Zealand) will seek in expanded access to Canada's protected market for its supply-managed commodities.

1. Most of the support for Canada's supply management systems is concentrated in Ontario, Quebec, and the Maritime provinces. What would be the internal politics associated with completely changing these systems or modifying them to allow for increased imports of dairy and poultry products from the United States and other TPP countries?

2. How strong is support among other Canadian economic sectors for maintaining Canada's supply management programs?

3. Could Canada ensure that the objectives of supply management (stable prices and income support to producers) are met if additional imports are allowed? Please elaborate on why or why not this would be the case.

Mandatory country-of-origin labeling (COOL) in the United States for specified agricultural products took effect on March 16, 2009. This was the culmination of a near decade-long legislative effort to arrive at an accommodation that addressed the concerns of competing interests. U.S. food retailers are now required to label the country of origin for fresh produce (fruits and vegetables), meats, nuts, and seafood, among other products. As the U.S. meat processing sector geared up to implement COOL, U.S. imports of Canadian cattle and hogs noticeably declined. Concerned that this development adversely affected their livestock sectors, Canada along with Mexico pressed their case using the World Trade Organization (WTO) dispute resolution process. The WTO panels handling this case found that COOL for meat violates international trading rules. To comply with the WTO findings, the United States revised the COOL regulations. Canada and Mexico argue that the changes are more discriminatory than those previously in effect, and they are now awaiting a decision by a WTO compliance panel on whether the revised COOL rules meet earlier WTO panels' findings.

IPR commitments in the Canada-EU Comprehensive Economic and Trade Agreement (CETA, concluded in principle in October 2013) may have implications for the TPP and T-TIP negotiations. A focal point is CETA commitments on geographical indications (GIs)—geographical names that act to protect the quality and reputation of a distinctive product originating in a certain region. Under CETA, Canada agreed to recognize GIs, for instance, on certain cheeses that are generally viewed as common food names in the United States, leading to concern on the part of some Members of Congress and U.S. companies about U.S. market access in Canada.

2. What are Canada's top IPR priorities in its FTA negotiations? How does the CETA affect Canada's negotiating positions in the TPP?

The Columbia River Treaty (CRT) is an international agreement between the United States and Canada for the cooperative development and operation of the water resources of the Columbia River Basin. It became effective in 1964. The CRT has no specific end date, and most of its provisions would continue indefinitely without action by the United States or Canada. However, beginning in September 2024, either nation can terminate the majority of the Treaty's provisions with at least 10 years written notice (i.e., starting as early as 2014). As of early 2014, both countries were reviewing their positions on the Treaty and formal negotiations may begin as early as late summer 2014.

The CRT was precipitated by several flooding events in the Columbia River Basin. It resulted from more than 20 years of negotiations between the two countries. It was ratified in 1961, and implementation began in 1964.

The Treaty provided for the construction and operation of 15.5 million acre-feet of additional storage on the Columbia River and its tributaries, including three dams in Canada and one dam in the United States whose reservoir extends into Canada. Together, these dams more than doubled the amount of reservoir storage available in the basin and provided significant flood protection benefits throughout the basin. The CRT also requires that the United States and Canada prepare "Assured Operating Plans," to allow for more predictable operations for flood control and power objectives in the United States, among other things. In exchange for these benefits, the United States agreed to provide Canada with lump sum cash payments as well as a portion of downstream hydropower benefits that are attributable to Canadian operations under the CRT, commonly known as the "Canadian Entitlement." The Canadian Entitlement has been estimated by some to be worth as much as $335 million annually.

The CRT has no specific end date, and its provisions would continue indefinitely without action by the United States or Canada. However, beginning in September 2024, either nation can terminate most provisions of the Treaty with at least 10 years written notice (i.e., starting as early as September 2014). Under the original Treaty, the only provisions scheduled to change in 2024 involve flood control by Canadian CRT projects, which are scheduled to transition to "called-upon" operations at that time. This means that the United States would request and compensate Canada for flood control operations as necessary.

The United States and the Canadian governments are both reviewing their positions on the CRT. The U.S. Army Corps of Engineers (Corps) and the Bonneville Power Administration (BPA), in their joint designated role as the "U.S. Entity," undertook a review of the Treaty from 2011 to 2013. Based on studies and stakeholder input, a final "Regional Recommendation" was coordinated by the U.S. Entity and provided to the State Department in December 2013. The Regional Recommendation was to continue the Treaty with certain modifications, including a rebalancing of the Treaty's hydropower provisions, further delineation of called-upon flood control operations after 2024, and incorporation into the Treaty of flows to benefit the Columbia River fisheries.

Separately, the Province of British Columbia (BC) initiated its own studies beginning in 2011, which resulted in a recommendation to continue the Treaty while "seeking improvements within the existing Treaty framework." The principles outlined by BC include broad requirements for called-upon flood control operations, acknowledge the potential ecosystem based improvements "inside and outside the treaty," and state the province's belief that the Canadian Entitlement does not account for the full "range" of benefits in the United States and the impacts on British Columbia.

U.S. stakeholder perspectives on the CRT and its review vary. Some believe that the Treaty should continue but be modified to include stronger provisions related to tribal resources and flows for fisheries that were not included in the original Treaty. Others disagree with some or all proposed changes of this type. Some focus on other potential changes, such as the perceived need to adjust the Canadian Entitlement to more equitably share actual hydropower benefits. For its part, BC has disputed several U.S. assumptions and recommendations during the Treaty review process.

The executive branch, through the State Department, will make the final determination on whether changes to the Treaty are in the national interest and will conduct negotiations with Canada related to the future of the CRT. The State Department's position on Treaty negotiations with Canada may differ with the Regional Recommendation. Further, the results of future negotiations between the U.S. and Canadian governments are uncertain.

The Constitution gives the Senate the power to approve, by a two-thirds vote, treaties negotiated by the executive branch. If the executive branch comes to an agreement regarding modification of the CRT, the Senate may be asked to weigh in on future versions of the Treaty pursuant to its advice and consent role. In addition, both houses of Congress have weighed in on Treaty review activities through their oversight roles and may continue to do so going forward.

The "Regional Recommendation" coordinated by the U.S. Entity was provided to the State Department in December 2013, and the State Department is currently evaluating the Administration's recommended position on Treaty negotiations. BC's recommendation to the Canadian government was finalized in April 2014. Both sides could provide notice of their intent to terminate Treaty provisions as early as September 2014, thus negotiations may begin at that point, if not sooner.

• 1. Assuming Treaty negotiations will take place, what are the most contentious components of upcoming Treaty negotiations from the Canadian point of view? On what issues is there agreement?
• 2. Assuming there will be Treaty negotiations, what issues are most important to Canadian stakeholders?
• 3. How has Treaty review thus far been received from the Canadian perspective? Have Canadian interests been satisfied with the U.S. approach to Treaty Review?

Flooding on Devils Lake, a "closed basin" lake in North Dakota with no natural outlets, led to the construction in 2005 of a man-made outlet by the State of North Dakota that empties into a separate river basin in the United States and Canada. The outlet was opposed by Canada and others due to its potential for interbasin transfer of species, parasites, and pathogens. Disagreement over the proposed outlet necessitated the involvement of an independent body to mediate international boundary water disputes, the International Joint Commission (IJC), and monitoring of the water body is ongoing.

Devils Lake is a natural lake and the primary water body in Devils Lake Basin, a "closed" basin (i.e., a basin without natural outlets) in northeastern North Dakota. The lake is in the midst of an unprecedented wet period which has resulted in significant flooding. Water levels in the lake began to increase in the 1940s and by 2010 had increased by more than 50.8 feet.⁶⁵ The lake has on multiple occasions flooded surrounding homes and farms and damaged local infrastructure, and continues to pose economic issues for the region. Rising lake levels have also resulted in the lake nearing the capacity of its "natural" outlet, which would cause it to spill into adjacent drainage basins in the United States and Canada.

Due to concerns stemming from rising lake levels, including ongoing and increasing flood risks, the Corps of Engineers designed and recommended in 2003 an outlet from Devils Lake. However the Corps estimated a 75% chance that the project would not be economically viable, and environmental permitting was expected by some to further alter or delay physical construction. In lieu of approval for the Corps project, the state of North Dakota went forward with its own planned outlet. From 2003 to 2005 the state constructed a 14-mile outlet from Devils Lake into the Sheyenne River, a tributary of the Red River which runs from Minnesota, through North Dakota, and eventually empties into Lake Winnipeg in Canada. Because federal funds were not used to build the outlet, the project was not subject to the same level of environmental review as federal projects. The outlet was opposed by Manitoba, Minnesota, and Canada, who were concerned that Devils Lake outflows may allow for the transfer of invasive species, fish parasites, and pathogens that would harm sport fisheries in the Red River Basin.

The International Joint Commission, or IJC, is a binational mediation organization established by the Boundary Waters Treaty of 1909.⁶⁶ Typically the IJC acts to approve work that impacts water quantity and quality (on either side of the U.S./Canada boundary), and reports on matters of dispute or difference between two nations. After construction of the North Dakota state outlet began in 2003, Canada requested a joint referral from the United States to the IJC. However, the United States refused, arguing that damage must occur before the treaty is violated. After completion of the outlet in 2005, a joint press release by the United States, Canada, North Dakota, Minnesota, and Manitoba announced a compromise with North Dakota in which the state agreed to install a filter on the outlet made up of sand, rock, and gravel to protect downstream areas from transfer. Additionally, in response to a 2005 request of the United States and Canada, a committee of scientists under the direction of the IJC investigated the risks of biological contamination of fish pathogens and parasites from Devils Lake into the Red River Basin, including those from the outlet and filter. The study was published in 2011.

In its 2011 risk assessment, the committee appointed by the IJC found limited bacteria and pathogens in Devils Lake are not found elsewhere in the basin and could be transferred through a number of pathways, including the current outlet.⁶⁷ However, the panel also concluded that the overall risk to downstream fish and fisheries from parasites and pathogens was low and potential cause for disease was minimal. The International Red River Board (the component of the IJC which produced the study) continues to monitor water quality and fisheries in the Red River Basin as they relate to the Devils Lake outlet.

• 1. What is the likelihood of future flooding of Devils Lake and potential overflow into the Red River Basin? Would this flooding significantly increase risks associated with potential disease vectors?
• 2. What are the ongoing uncertainties surrounding releases from the Devils Lake Basin into the Sheyenne River and the Red River Basin?
• 3. Did the IJC work as intended in the case of Devils Lake? What is its ongoing role likely to be? What lessons were learned in this process?
• 4. How have the differences over Devils Lake affected U.S./Canada relations through the IJC?

Regulatory regimes at the international, national, and state levels are in place to manage and require treatment of ballast water discharges from vessels. The impact of nonnative aquatic nuisance species (ANS, also known as invasive species) has been a concern for several decades. Until recently, these regimes have required minimal ballast water controls (i.e., ballast water exchange and saltwater flushing) for oceangoing vessels entering the Great Lakes-St. Lawrence River system and other U.S. waters. Regulatory agencies now are adopting numeric standards for ballast water discharge that will require installation of treatment technology on most vessels in the near future. Many vessel owners and operators are concerned about the feasibility of achieving ballast water discharge performance standards and also about the need to harmonize requirements.

Ballast water discharge has been identified as a major pathway for the introduction of nonnative ANS. Ships use large amounts of ballast water for stability during transport. Ballast water is often taken on in the coastal waters in one region after ships discharge wastewater or unload cargo, and then discharged at the next port of call, wherever more cargo is loaded, which reduces the need for compensating ballast. Thus, the practice of taking on and discharging ballast water is essential to the proper functioning of ships, because the water that is taken in or discharged compensates for changes in the ship's weight as cargo is loaded or unloaded, and as fuel and supplies are consumed. However, ballast water discharge typically contains a variety of biological materials, including nonnative ANS that can alter aquatic ecosystems. The spread of nonnative ANS, such as the zebra mussel, has had a significant impact on the Great Lakes, including economic impacts such as impairment on cooling water systems at power plants.

The EPA permit acknowledges unique vulnerabilities of the Great Lakes system to ANS invasion through ballast water discharges, and it includes additional protection for these waters. It requires all vessels that operate outside the Exclusive Economic Zone (EEZ) and more than 200 nautical miles from any shore to conduct saltwater flushing of ballast tanks before entering Great Lakes waters through the Saint Lawrence Seaway System. Also, all vessels that are equipped to carry ballast water and that enter the Great Lakes must conduct open ocean ballast water exchange.

Vessels may comply with the concentration-based numeric treatment limits in the EPA permit in one of four ways, one of which is to discharge treated ballast water that meets the applicable numeric limits (i.e., by using treatment technology). EPA estimates that approximately 2,880 domestic and 5,270 foreign vessels are potentially subject to the ballast water standards, because they operate with on-board ballast water tanks, and the agency anticipates that about 40% of covered vessels will comply by installing a ballast water treatment system. EPA has concluded that several treatment technologies capable of meeting the permit's numeric limits are commercially and economically available now for shipboard installation. New vessels constructed after December 1, 2013, must comply with the permit's numeric limits upon delivery, while existing vessels constructed before that date must comply under a staggered schedule between January 1, 2014, and January 1, 2016. Environmental advocates believe that the performance standards in the EPA permit are not stringent enough to address the ANS problem, and they have challenged the permit in federal court.

Certain vessel classes are not be subject to the ballast water numeric limits in the EPA permit. These include vessels engaged in short-distance voyages (e.g., they travel no more than 10 nautical miles), unmanned and unpowered barges, small inland and seagoing vessels (less than 3,000 gross tons), and existing bulk carrier vessels built before January 1, 2009, that operate solely within the Great Lakes (commonly known as "Lakers"). In general, according to EPA, these vessels face a number of challenges for managing ballast water, and in the case of existing Lakers there currently are no available treatment systems. Thus EPA has concluded that it is more appropriate to require these vessels to use best management practices (BMPs) such as avoiding discharge of ballast water in environmentally sensitive areas, but not require compliance with numeric limits.

A number of U.S. states also have ballast water discharge regulations, including several in the Great Lakes region. Some establish separate permit requirements (e.g., Michigan, Wisconsin, and Minnesota), and a few include numeric discharge standards more stringent than those in the EPA permit (e.g., New York and California).

In 1989, Canada issued guidelines for voluntary ballast water exchange (BWE) outside the Exclusive Economic Zone (EEZ) for vessels entering the Great Lakes, and in 2000, these guidelines were expanded to cover all Canadian waters. In 2006, all vessels entering the Great Lakes were required to manage their ballast water through BWE and saltwater flushing for vessels. Canada's regulations call for meeting the IMO D-2 performance standard for ballast water treatment when the Convention enters into force, but not before then. The Canadian regulatory agency, Transport Canada, has issued a discussion paper outlining regulatory changes that would be needed to implement the Convention. The proposed regulatory changes would also apply to Laker vessels, which would be required to meet the IMO D-2 standard. However, Transport Canada proposes granting an extension in the timeline for treatment systems to be installed on Laker vessels.

Many Canadian and U.S. owners and operators of vessels are concerned about overlap and inconsistency among international, national and state ballast water discharge requirements and have sought better harmonization. For example, although the IMO D-2 standards, Coast Guard rules, and EPA permits detail the same numeric standards, they differ in some aspects, such as compliance deadlines, technology certification, and exemptions or exclusions.⁷¹ The Lake Carriers Association, representing commercial shipping operators, unsuccessfully challenged separate state ballast water rules, which they contend subject shippers to multiple state requirements. Vessel owners and operators also are concerned about the availability of technology to meet ballast water discharge performance standards and compliance deadlines. The Coast Guard has been granting compliance extensions to its ballast water rules because of unavailability of certified technologies.⁷² The Canadian Shipowners Association (CSA) challenged the EPA permit (which does not provide for similar extensions) in U.S. federal court, seeking review of the permit's January 1, 2014, deadline for some existing vessels to install necessary technology and compliance extensions similar to those granted by the Coast Guard. In April, the federal court granted CSA's request to stay the January 1 deadline for vessels operated by CSA members while the court expedites review of the permit as a whole.

• 1.Does Canada see a need to harmonize the international, national, and other regulatory regimes that govern ballast water discharges from vessels? If so, how might this occur?
• 2.If the IMO Convention is not ratified by a sufficient number of countries in the near future for it to go into effect, will Canada pursue the proposed regulatory changes outlined in Transport Canada's discussion paper, including adoption of the IMO D-2 standard?

The electric power grids of the United States and Canada are physically connected. Consequently, electric power reliability problems can easily cross the international border. This was demonstrated by the 2003 power blackout, which originated in Ohio and eventually spread into eastern Canada and the northeastern United States. The United States and Canada are therefore mutually dependent for the reliable operation of their common electric power systems. The interconnected grid also creates opportunities for trade and joint expansion of the use of renewable power.

There are three components of electric power delivery: generation by power plants, transmission over long distances by high voltage power lines, and final delivery over low voltage distribution lines to end-users. The transmission lines that constitute the North American power grid cross state, provincial, and international boundaries. The U.S. and Canadian electricity grids are linked by physical ties and operational economics:

• At the broadest level of organization, the North American grid is divided into regional "interconnections" within which power moves freely (the links among the regions are very limited). The large Eastern and Western Interconnections cover most of the contiguous United States and the heavily populated regions of Canada.
• At the level of major transmission lines, the Canadian grid has evolved by building south from heavily populated areas to connect with U.S. generation and load. Consequently, while the grid in the conterminous United States is a web crisscrossing the lower 48 states, the Canadian backbone system consists of north-south lines closely linked to the United States. More electricity actually moves north and south between the United States and Canada than east and west among Canadian provinces.
• In terms of system reliability, as discussed further below, the North American Electric Reliability Corporation (NERC) has responsibilities for the reliable operation of the power grid in both countries. Three of the eight regional reliability entities through which NERC performs much of its work extend from the United States into Canada and cover the latter's entire southern tier.
• Under Executive Order 11423, the U.S. Secretary of State has the authority to receive applications for and to issue Presidential permits for the construction, connection, operation, or maintenance of certain facilities at the borders of the United States with Canada and Mexico. The Department of State determines whether a proposed border-crossing project is in the U.S. national interest, and the analysis of an application for an electricity transmission line is undertaken by the Department of Energy (DOE).

Other transmission projects include the Minnesota Power-Manitoba Hydro agreement (i.e., the Great Northern Transmission Line project) to accommodate sales of hydropower to the United States, and the Soule Hydro, LLC transmission project connecting the BC Hydro Stewart substation to Southeast Alaska.

Another factor important in determining Canada's ability to export increased volumes to the United States concerns recent reforms in Mexico. Mexico's oil production has contracted over the past years, but recent reforms undertaken by the government promise to reverse the downward production trend. Mexico is opening its oil industry, dominated by PEMEX, the state oil company, to investment by international oil companies. Any increased output by Mexico will likely be sent to the U.S. market where it will compete with rising U.S. production, as well as potentially rising Canadian imports. This competition for a place in the U.S. market may provide an incentive for Canada to diversify its exports in the future.

5. In light of increasing U.S. oil production and the likelihood of increased Mexican oil production how, and should, Canada diversify its oil export strategy?

6. What infrastructure improvements will Canada need to allow its oil to compete in the broader world market?

A final State Department decision on the re-filed Keystone XL permit application appears unlikely before the fourth quarter of 2014 due to legal challenges to the pipeline's approval in the Nebraska courts. President Obama has stated that he would grant the Presidential Permit "only if this project doesn't significantly exacerbate the problem of carbon pollution." Congress may act to influence this decision in the meantime. Numerous bills introduced in the 113^th Congress would effectively approve the Keystone XL Pipeline.⁷⁸

1. Will the State Department approve the reconfigured Keystone XL pipeline?

2. How might the development of the Keystone XL pipeline affect the regional availability and price of petroleum products in North America?

3. What are the prospects for new Canadian pipelines to Pacific or Atlantic markets and how might the Keystone XL pipeline affect those?

4. To what extent should the Keystone XL pipeline, added to the other recently constructed oil pipelines from Canada, require special safety or environmental oversight?

5. How might oil supplies from the Keystone pipeline affect U.S. oil imports from other countries?

6. What could be the nature and timing of regional economic effects associated with the pipeline's construction?

7. What are the market and safety implications of increased oil imports by rail if Keystone XL is not constructed?

8. What are the climate implications of Keystone XL and how would the project affect U.S. and Canadian efforts to reduce their emissions of greenhouse gases?

The United States and Canada are increasingly relying on railroads to transport crude oil from new producing regions in the Bakken shale of North Dakota and Montana and the oil sands region in Alberta. Crude oil from both locations is frequently crossing the border for shipment to U.S. and Canadian refineries. About two-thirds of Bakken oil is carried away by train. Pipelines, the more economic means of shipping oil overland, are either not available or have insufficient capacity to move all of the oil (see "Keystone XL Pipeline" above). In an evolving and dynamic oil market, railroads also offer more optionality in moving oil to where it commands the highest price. In 2013, over 400,000 railroad tank cars were loaded with crude oil in the United States, and 150,000 in Canada.

Bakken crude oil, along with recent developments in ethanol transport, represents the first time that hazardous materials are moving in unit train configuration. Unit trains carry a single commodity from a single origin to a single destination, bypassing rail yards where mixed trains are broken down and built up depending on destination. Therefore, unit trains create a large concentration of hazardous material increasing the likelihood that if an accident occurs, it could have major consequences. Oil from the Canadian oil sands region currently moves in shipments of several cars at a time in mixed trains but could also soon be moving in unit trains. Matching the typical throughput of a single pipeline requires four to five 100-car unit trains per day.

Past experience suggests that one can expect a derailment for every 100,000 railcars transported. Several derailments involving Bakken oil have caused large explosions and fires requiring evacuations of nearby residents. In the most serious case, 47 people died following the derailment of a train of oil tank cars in Lac Mégantic, Quebec. This train originated in North Dakota, passed through Ontario and Quebec, and would have proceeded across Maine to a refinery at Saint John, New Brunswick, highlighting the international nature of rail safety enforcement.

The use of long trains of tanker cars, including unit trains, poses difficult challenges for responders whose experience with similar loads may be limited to a single gasoline tank truck on fire. Fires involving multiple tank cars of Bakken crude have been too intense for firefighters and have been allowed to burn out under watch. Derailments of cars carrying oil sands product have not caused fires, but the oil is particularly dense and difficult to clean up. The issue for policy makers is how to improve the safety of rail transport of crude oil and mitigate the damage when accidents do occur. Since freight rail transportation between the United States and Canada is highly integrated, a harmonized approach by the two countries is desirable.

A comprehensive approach to reducing the risk of crude-by-rail accidents involves reducing the likelihood of derailments, addressing the vulnerability of tank cars in derailments, and mitigating the consequences of oil releases. U.S. data clearly identify the leading cause of derailments: broken rails or welds. Broken rails or welds caused nearly one in four (23%) derailments between 2001 and 2010, nearly five times as many as the second leading cause, track geometry. The key to preventing derailments is finding rail defects early enough to allow railroads sufficient time to repair track without interrupting service. This requires inspecting rail frequently with advanced technology that can detect rail imperfections at their earliest stages. Currently, railroads conduct periodic track inspections with specially outfitted vehicles, but it may be feasible to install track-inspection technology on locomotives to achieve near continuous track inspection.

Tank cars can be strengthened to reduce the risk of product release in a derailment, but there is a weight constraint. Railroads have maximum load limits (generally 286,000 lbs. per car), so increasing car weight will reduce the amount of product that can be carried per car. This raises accident exposure as more tank cars are needed to carry the same amount of product. The vulnerability points are often the ends of the tank, where the coupler from a neighboring car can pierce the tank wall. Couplers can be modified with shelves to reduce decoupling, metal shields can be added to the ends of cars, the thickness of the steel can be increased on tank car shells, and a protective metal jacket can cover the shell to reduce the likelihood of puncture. Insulation can be layered between the shell and jacket to delay the effects from nearby cars on fire. The handles of bottom valves can be modified to break off during derailment rather than opening the valve. Pressure relief valves on top of the car can be modified to reduce pressure more quickly. All of these measures are being evaluated, but there is disagreement among railroads, car manufacturers, and oil shippers (who purchase and own most of the tank cars) over which features should be required. Some of these features (such as valves and shields) can be more easily retrofitted to existing cars than others (increased shell thickness).

The third element of addressing the safety of crude by rail is mitigating the consequences of an accident. Congress provides federal grants for training local emergency responders to transportation spills of hazardous material. The funds are raised through registration fees paid by shippers of hazardous materials. The railroad industry and hazardous material shippers also provide hands-on and web-based training to emergency responders through an industry-funded and industry-administered program. Although railroads must provide federal regulators with their plans for dealing with accidents involving hazardous material, the requirements are not nearly as specific and detailed as those required for oceangoing tankers and barges carrying oil. For instance, railroads are not required to ensure by contract or other means that personnel and equipment are available to handle a worst-case spill. A related issue is how much information railroads should provide local communities about the trains carrying crude oil traveling through their district.

On May 13, 2014, the U.S. Department of Transportation (DOT) issued a safety advisory to railroads to use newer tank cars that have additional safety features when moving crude oil whenever reasonably practicable. In April 2014, Transport Canada announced that the oldest DOT-111 tank cars (about 5,000 that lack bottom reinforcement) would no longer be allowed for use in transporting dangerous goods and the remaining fleet would either be phased out or retrofitted within three years. Transport Canada expects to finalize regulations by the summer of 2014. The U.S. DOT submitted its proposed regulations on tank car safety design to the Office of Management and Budget for review at the end of April 2014. Final U.S. regulations are also expected in the summer of 2014, and they are expected to be in harmony with Canadian regulations. Railroads, shippers, and tank car builders could issue their own tank car standard but they have not reached agreement on all safety features to be required.

While U.S. DOT is working on finalizing regulations, the agency reached an agreement with railroads in February 2014 that they would voluntarily take certain measures to improve the safety of oil trains by July 1, 2014. The measures include adding braking power, reducing train speeds to 40 mph through urban areas, installing additional wayside wheel bearing detectors, performing one additional internal-rail inspection each year beyond those required by regulation, and conducting at least two high-tech track geometry inspections over crude oil routes. Railroads also agreed to perform a routing analysis of oil trains in an attempt to identify the safest routes, similar to the analysis they currently conduct to transport toxic-by-inhalation hazardous materials. Such a requirement is controversial because avoiding large urban areas can increase the length of time such trains are in transit and because smaller towns and rural areas likely have less capability to respond to emergencies than large cities. Also, it is unclear to what extent alternative routes are available.

In addition to railroad operations, another area of regulatory scrutiny is the flammability of Bakken crude oil. If the U.S. DOT determines that the properties of Bakken oil pose an unusual safety risk, it could require that the oil be processed before shipping, requiring additional facilities at the origin points.

Congress held three hearings on crude by rail safety in early 2014. Rail safety might be addressed in reauthorization of surface transportation funding programs or in reauthorization of rail safety initiatives.

1. What is the optimum mix of safety measures that could be applied to crude-by-rail transportation?

2. How might new safety requirements affect the economics of crude by rail?

3. Are there any substantive differences in rail safety regulation between the United States and Canada?

4. How can the United States and Canada harmonize rail safety regulations for the benefit of cross border trade and transportation?

5. What is the safety record of pipelines compared to rail transport?

6. How much burden should be placed on the railroads and oil shippers to ensure that communities can adequately respond to crude by rail derailments?

7. How does the ability to move crude by rail affect North America's energy security?

Author Contact Information

Acknowledgments

This report was originally written and coordinated by former longtime Specialist in International Relations, [author name scrubbed].

Footnotes

Written by [author name scrubbed], Specialist in International Trade and Finance, and [author name scrubbed], Specialist in European Affairs, Foreign Affairs, Defense, and Trade Division.

"Canada: Martin on the Ropes in Funding Scandal." Oxford Analytica. February 25, 2004. February 23, 2004. "Canada's Premier Acts to Counter Scandal." By DeNeen L. Brown. Washington Post. February 17, 2004.

"Canadian Leader Shuts Parliament To Avoid No-Confidence Vote, Angering Many." New York Times. December 6, 2008. The Harper government asked for a second prorogation in December 2009 in what some observers claim was an attempt to avoid parliamentary inquiries over official knowledge about the turnover by the Canadian military to Afghan authorities of prisoners who were subsequently abused and reportedly tortured. This second prorogation in roughly a year's time again prompted harsh criticism by the opposition parties that the PM was flaunting parliamentary democracy, as well as leading to scattered protests around the country. "Harper Goes Prorogue." The Economist. January 9, 2010.

Data from Canadian Parliament's website, updated August 2011: http://www.parl.gc.ca/Parlinfo/Files/Parliament.aspx?Item=1924d334-6bd0-4cb3-8793-cee640025ff6&Language=E&MenuID=Lists.Parliament.aspx.

"There's Gold in Them Thar Vaults," January 9. 2014 http://www.economist.com/blogs/americasview/2014/01/selling-canada-s-government-assets

"Supreme Court Reject Harper Government's Proposal for Senate Reform," Toronto Star, April 25, 2013.

Foreign Affairs, Trade and Development Canada, Canada's Free Trade Agreements, http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fta-ale.aspx?lang=eng.

Foreign Affairs, Trade and Development Canada, Global Markets Action Plan, 2013, p. 6.

For the Canadian government's summary of its international policy priorities, see Foreign Affairs, Trade and Development Canada, Priorities for 2013-2014, June 25, 2013. http://www.international.gc.ca/department-ministere/priorities-priorites.aspx?view=d.

National Defence and the Canadian Armed Forces, Canadian participation in NATO reassurance measures, May 28, 2014, http://www.forces.gc.ca/en/operations-abroad/nato-ee.page?

"Canada will play a role in any permanent mission in Eastern Europe: Conservative MP," Global News, May 11, 2014, http://globalnews.ca/news/1323858/canada-will-play-a-role-in-any-permanent-mission-in-eastern-europe-conservative-mp/.

Foreign Affairs, Trade and Development Canada, North Atlantic Treaty Organization (NATO), http://www.international.gc.ca/nato-otan/index.aspx?lang=eng.

Jane's Sentinel Security Assessment – North America, Canada: External Affairs, updated May 22, 2014.

National Defence and the Canadian Armed Forces, Current Operations, May 26, 2014, http://www.forces.gc.ca/en/operations-abroad-current/index.page?

United States Department of State, Bureau of Western Hemisphere Affairs, U.S. Relations with Canada, August 23, 2013, http://www.state.gov/r/pa/ei/bgn/2089.htm.

Jane's Sentinel Security Assessment – North America, op. cit.

David Pugliese, "Canada, US Eye Arctic Responsibilities for NORAD," DefenseNews, May 3, 2014, http://www.defensenews.com/article/20140503/DEFREG02/305030018/Canada-US-Eye-Arctic-Responsibilities-NORAD.

Joel Sokolsky, U.S. Ballistic Missile Defense, NORAD, and the Canada Conundrum, Bridgewater Review, 33(1), May 2014, pp. 8-11.

Steven Chase, "Ottawa examines merites of U.S. missile defence program," The Globe and Mail, May 12, 2014, http://www.theglobeandmail.com/news/politics/ottawa-examines-merits-of-us-missile-defence-program/article18631579/.

Canada First Defence Strategy, http://www.forces.gc.ca/assets/FORCES_Internet/docs/en/about/CFDS-SDCD-eng.pdf.

International Institute for Strategic Studies, The Military Balance 2013, p. 68.

http://www.forces.gc.ca/en/about-org-structure/canadian-joint-operations-command.page.

NATO Public Diplomacy Division, Financial and Economic Data Relating to NATO Defence, February 24, 2014.

Murray Brewster, "Federal budget sends Canadian military's equipment buying plan into limbo; new fighter jets likely off the table," National Post, February 11, 2014, http://news.nationalpost.com/2014/02/11/federal-budget-sends-canadian-militarys-equipment-buying-plan-into-limbo-new-fighter-jets-likely-off-the-table/.

In April 2009, U.S. Department of Homeland Security Secretary Janet Napolitano raised concerns when she averred that some of the 9/11 terrorists and crossed over from Canada. "Napolitano's Comments about Canada's Border Spark Diplomatic Kerfuffle." The Canadian Press. April 21, 2009.

"Al-Qaida In Canada?" CBSNEWS.com. April 25, 2002. "Canada Alters Security Policy To Ease Concerns of U.S." By Clifford Krauss. New York Times. February 18, 2002.

Canadian Government Fact Sheet: A Unique and Vital Relationship, modified, June 2, 2011,

http://www.canadainternational.gc.ca/can-am/offices-bureaux/welcome-bienvenue.aspx?lang=eng&view=d.

U.S. Department of Commerce, International Trade Administration, Canadian Travel to the United States 2011, Washington, D.C., December 2012; Canadian Tourism Commission, Delivering Value for Canada's Tourism Businesses Through Innovation and Efficiency, Vancouver, B.C. 2013.

United States-Canada Beyond the Border Action Plan, December 2011, available at http://www.dhs.gov/xlibrary/assets/wh/us-canada-btb-action-plan.pdf.

U.S. Government Accountability Office, Border Security: DHS Progress and Challenges in securing the US Southwest and Northern Borders, GAO-11-508T, March 30, 2011, p. 6, http://www.gao.gov/new.items/d11508t.pdf.

Economic data and forecasts are from the Economist Intelligence Unit, IHS Global Insight, Global Trade Atlas, and Statistics Canada.

See CRS Report R41875, The U.S.-Canada Energy Relationship: Joined at the Well, by [author name scrubbed] and [author name scrubbed].

U.S. Energy Information Administration (EIA), Country Analysis Brief: Canada, December 2012, http://www.eia.gov/countries/cab.cfm?fips=CA.

Statistics from Global Trade Atlas.

"U.S. Gets a Lift In Lumber Fight With Canada." By Ian Austen and Clifford Krauss. New York Times. August 31, 2005. "Conservative Government Wins Softwood Truce." Globe and Mail. April 28, 2006.

USTR 2014 Annual Report, p. 25 http://www.ustr.gov/sites/default/files/2014%20Trade%20Policy%20Agenda%20and%202013%20Annual%20Report.pdf#page=4&zoom=auto,0,175

Office of Management and Budget, "Updated Implementing Guidance for the American Recovery and Reinvestment Act of 2009, April 3, 2009. pp. 160-166.

"U.S.-Canada Announce Buy American Deal, Provinces to Sign GPA," Inside U.S. Trade, February 12, 2010.

"In TPP, Canada May Seek Bilateral Deals with U.S. on Procurement, Visas," Inside U.S. Trade, March 14, 2013.

A "Priority Watch List" is a heightened designation of criticism for a country's allegedly inadequate IPR protection and enforcement, while the "Watch List" reflects a milder category of criticism. United States Trade Representative, 2011 Special 301 Report, p. 46. http://www.ustr.gov/sites/default/files/05012013%202013%20Special%20301%20Report.pdf.

The WIPO Copyright treaty updates existing copyright protections for Internet and other electronic media.

"John Ivison: Canada Will Do Whatever It Takes to Ensure Security of U.S.—If It Doesn't Cost too Much" National Post, May 5, 2014.

CRS Report RL30234, The Pacific Salmon Treaty: The 1999 Agreement and Renegotiated Annex IV, by [author name scrubbed].

This section was written by [author name scrubbed], Analyst in European Affairs, Foreign Affairs, Defense, and Trade Division.

National Strategy for the Arctic Region, May 2013, http://www.whitehouse.gov/sites/default/files/docs/nat_arctic_strategy.pdf.

Implementation Plan for the National Strategy for the Arctic Region, January 2014, http://www.whitehouse.gov/sites/default/files/docs/implementation_plan_for_the_national_strategy_for_the_arctic_region_-_fi....pdf and "Lisa Murkowski: White House's Arctic 'implementation plan' lacks action," Alaska Dispatch, February 13, 2014, http://www.alaskadispatch.com/article/20140213/lisa-murkowski-white-houses-arctic-implementation-plan-lacks-action.

Written by [author name scrubbed], former Specialist in Immigration Policy, and updated by [author name scrubbed], Section Research Manager, Domestic Security and Immigration Section, Domestic Social Policy Division.

Written by [author name scrubbed], Specialist in International Trade and Finance; Foreign Affairs, Defense, and Trade Division.

"Canada Finalizes FTA with Korea Despite Automotive Sector's Concerns," International Trade Reporter, March 11, 2014

Written by Angeles Villarreal, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division.

The White House, Office of the Press Secretary, Fact Sheet: Key Deliverables for the 2014 North American Leaders Summit, February 19, 2014.

The White House, Office of the Press Secretary, "Joint Statement by North American Leaders – 21^st Century North America: Building the Most Competitive and Dynamic Region in the World," February 19, 2014.

The White House, Office of the Press Secretary, "Declaration by President Obama and Prime Minister Harper of Canada – Beyond the Border," February 04, 2011.

The White House, Office of the Press Secretary, "Fact Sheet: U.S.-Mexico High Level Economic Dialogue," September 20, 2013.

Written by James Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division.

CRS Report RS21904, The Financial Action Task Force: An Overview, by [author name scrubbed].

Written by Catherine Theohary, Specialist in National Security Policy and Information Operations, Foreign Affairs, Defense, and Trade Division

The White House, Office of the Press Secretary, Remarks by the President On Securing Our Nation's Cyber Infrastructure, May 29, 2009.

Written by [author name scrubbed], Specialist in Agricultural Policy, Resources, Science and Industry Division.

Written by [author name scrubbed], Specialist in Agricultural Policy, Resources, Science and Industry Division.

Written by [author name scrubbed], Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division.

Written by Charles Stern, Specialist in Natural Resource Policy, Resources, Science, and Industry Division.

Written by Charles Stern, Specialist in Natural Resource Policy, Resources, Science, and Industry Division.

Molly Bensley, Terry A. Dick, and Crystal Hudson, et al., Devils Lake- Red River Basin Fish Parasite and Pathogen Project Qualitative Risk Assessment, International Joint Commission and International Red River Board, http://www.ijc.org/php/publications/pdf/DEVILS%20LAKE%20%20FISH%20PARASITE%20AND%20PATHOGEN%20RISK%20REPORT%20_8_.pdf. Hereafter Bensley et al.

The IJC is composed of three U.S. and three Canadian commissioners, who are expected to act impartially and not represent their governments. The IJC has established over 20 local basin boards, including the International Red River Board, to study issues of mutual concern.

Bensley et al.

Written by [author name scrubbed], Specialist in Resources and Environmental Policy, Resources, Science and Industry Division.

The IMO, a body of the United Nations, sets international maritime vessel safety and marine pollution standards. Numeric discharge limits in the IMO ballast water convention, referred to as the D-2 standards, will enter into force 12 months after ratification by 30 nations, representing 35% of the world merchant shipping tonnage. As of May 2014, this convention had been ratified by 39 nations, representing 30% of the world merchant shipping tonnage. Canada ratified the convention in 2010. The United States has not ratified the convention.

U.S. Department of Homeland Security, Coast Guard, "Standards for Living Organisms in Ships' Ballast Water Discharged in U.S. Waters; Final rule," 77 Federal Register 17254-17320, March 23, 2012. The Coast Guard's authority for these rules is the Nonindigenous Aquatic Nuisance Prevention and Control Act, as amended by the National Invasive Species Act (16 U.S.C. 4701 et seq.).

For example, Lakers are exempt from the numeric discharge standard in the Coast Guard rule, but are not exempt from the IMO D-2 numeric performance standard. Lakers also are exempt from the numeric standard in the EPA permit, but they are required to utilize best management practices to control ballast water discharges.

Coast Guard rules require owners and operators of vessels to install treatment technologies that have been certified by two Coast Guard-approved, third-party laboratories. A Coast Guard official stated in March that only one technology is in the process of being approved, but none has been qualified so far.

Written by Richard Campbell, Specialist in Energy Policy; Resources, Science, and Industry Division.

By [author name scrubbed], Specialist in Energy Economics, Resources, Science, and Industry Division.

Written by Paul Parfomak, Specialist in Energy Policy; Resources, Science, and Industry Division.

U.S. Energy Information Administration (EIA), Country Analysis Brief: Canada, December 2012, http://www.eia.gov/countries/cab.cfm?fips=CA.

U.S. Energy Information Administration, Import/Export data, http://www.eia.doe.gov/petroleum/data.cfm#imports

See: S. 2314, S. 2280, S. 2170, S. 582, S. 17, H.R. 4550, H.R. 4304, H.R. 4286, H.R. 3895, H.R. 3885, H.R. 3703, H.R. 2674, H.R. 334, and H.R. 3.

Written by [author name scrubbed], Specialist in Transportation Policy, Resources, Science, and Industry Division.