Canada-U.S. Relations February 10, 2021 The United States and Canada typically enjoy close relations. The two countries are bound together by a common 5,525-mile border—“the longest undefended border in the world”—as Peter J. Meyer well as by shared history and values. They have extensive trade and investment ties and long- Specialist in Latin standing mutual security commitments under NATO and North American Aerospace Defense American and Canadian Command (NORAD). Canada and the United States also cooperate closely on intelligence and Affairs law enforcement matters, placing a particular focus on border security and cybersecurity initiatives in recent years. Ian F. Fergusson Specialist in International Although Canada’s foreign and defense policies usually are aligned with those of the United Trade and Finance States, disagreements arise from time to time. Canada’s Liberal Party government, led by Prime Minister Justin Trudeau, has prioritized multilateral efforts to renew and strengthen the rules -based international order since coming to power in November 2015. It expressed disappointment with former President Donald Trump’s decisions to withdraw from international organizations and accords, and it questioned whether the United States was abandoning its global leadership role. Cooperation on international issues may improve under President Joe Biden, who spoke with Prime Minister Trudeau in his first call to a foreign leader and expressed interest in working with Canada to address climate change and other global challenges. The United States and Canada have a deep economic partnership, with approximately $1.4 billion of goods crossing the border each day in 2020. Bilateral trade relations have been somewhat strained in recent years, however, due to the countries’ differing trade policy objectives. Canadian officials expressed particular frustration with the Trump Administration’s insistence on renegotiating the 1994 North America Free Trade Agreement (NAFTA), which resulted in the United States-Mexico-Canada Agreement (USMCA), and its imposition of tariffs on Canadian steel and aluminum. The Biden Administration may take a less confrontational approach to trade relations with Canada. Nevertheless, some long-standing issues, such as cross-border oil pipelines, softwood lumber, and Buy American policies , likely will remain contentious. Because Canada and the United States are similar in many ways, lawmakers in both countries often study policies and solutions proposed across the border. U.S. and Canadian domestic policies diverged on various matters over the past four years, as the Trudeau government implemented a carbon pricing system to address climate change, legalized the recreational cannabis market, increased refugee resettlement, and expanded Canada’s social safety net. The U.S. and Canadian governments also diverged in their responses to the Coronavirus Disease 2019 (COVID-19) pandemic with respect to the role of the federal government and fiscal policies to mitigate the economic impact on individuals and businesses. The 116th Congress enacted several measures related to U.S.-Canada relations. Perhaps most significantly, the United States-Mexico-Canada Agreement Implementation Act (P.L. 116-113) was signed into law in January 2020, paving the way for the agreement’s entry into force. Congress also continued to support Great Lakes restoration efforts, appropriating $320 million for such purposes in FY2020 (P.L. 116-94) and $330 million in FY2021 (P.L. 116-260). In 2019, both houses adopted resolutions (S.Res. 96 and H.Res. 521) commending Canada for upholding the rule of law and its international legal commitments following the arrest of Meng Wanzhou, an executive at the Chinese technology company Huawei, to comply with an extradition request from the United States. U.S.-Canada cooperation on trade, environmental protection, foreign affairs, and various other issues may remain of interest to the 117th Congress. Congressional Research Service link to page 5 link to page 6 link to page 7 link to page 7 link to page 8 link to page 11 link to page 13 link to page 14 link to page 16 link to page 16 link to page 17 link to page 19 link to page 21 link to page 22 link to page 24 link to page 26 link to page 27 link to page 29 link to page 31 link to page 32 link to page 32 link to page 34 link to page 35 link to page 36 link to page 38 link to page 39 link to page 39 link to page 40 link to page 41 link to page 41 link to page 42 link to page 43 link to page 44 link to page 45 link to page 45 link to page 46 link to page 48 link to page 50 link to page 8 link to page 9 link to page 22 Canada-U.S. Relations Contents Introduction ................................................................................................................... 1 Politics and Governance ................................................................................................... 2 Liberal Majority Government: 2015-2019 ..................................................................... 3 2019 Election............................................................................................................ 3 Minority Government and Pandemic Response .............................................................. 4 Foreign and Defense Policy .............................................................................................. 7 NATO Commitments ................................................................................................. 9 Relations with China ................................................................................................ 10 U.S.-Canada Security Cooperation ............................................................................. 12 North American Aerospace Defense Command ....................................................... 12 Border Security .................................................................................................. 13 Cybersecurity .................................................................................................... 15 Economic and Trade Policy ............................................................................................ 17 Budget Policy ......................................................................................................... 18 Monetary Policy ...................................................................................................... 20 Investment.............................................................................................................. 22 U.S.-Canada Trade Relations ..................................................................................... 23 United States-Mexico-Canada Agreement .............................................................. 25 Canada’s Network of Free Trade Agreements ......................................................... 27 Disputes............................................................................................................ 28 Softwood Lumber ......................................................................................... 28 Dairy .......................................................................................................... 30 Intel ectual Property Rights ............................................................................ 31 Government Procurement............................................................................... 32 Steel and Aluminum Tariffs ............................................................................ 34 Energy......................................................................................................................... 35 Keystone XL Pipeline .............................................................................................. 35 Trans-Mountain Pipeline........................................................................................... 36 Environmental and Transboundary Issues ......................................................................... 37 Climate Change....................................................................................................... 37 Paris Agreement Commitments ............................................................................ 38 Climate Strategy ................................................................................................ 39 COVID-19 Climate Mitigation Activities.......................................................... 40 Healthy Environment and Healthy Economy Plan .............................................. 41 U.S.-Canada Cooperation to Reduce Greenhouse-Gas Emissions............................... 41 The Arctic .............................................................................................................. 42 Great Lakes ............................................................................................................ 44 Outlook ....................................................................................................................... 46 Figures Figure 1. Map of Canada’s 2019 Federal Election Results ..................................................... 4 Figure 2. Confirmed Cases of COVID-19 in Canada............................................................. 5 Figure 3. Recorded and Projected Real GDP, United States and Canada: 2017-2022 ................ 18 Congressional Research Service link to page 23 link to page 25 link to page 25 link to page 26 link to page 21 link to page 28 link to page 39 link to page 41 link to page 41 link to page 50 Canada-U.S. Relations Figure 4. Recorded and Projected Budget Deficits, United States and Canada: 2017-2025 ........ 19 Figure 5. Recorded and Projected Policy Interest Rates, United States and Canada: 2004- 2025......................................................................................................................... 21 Figure 6. Exchange Rates: 2005-2020 .............................................................................. 22 Tables Table 1. United States and Canada: Selected Comparative Economic Statistics, 2019 .............. 17 Table 2. Composition of Trade with Canada 2020: Top 15 Commodities................................ 24 Table 3. U.S. Crude Oil Imports from Canada: 2016-2020 ................................................... 35 Table 4. Selected Greenhouse-Gas (GHG) Emissions Indicators in Canada and the United States ....................................................................................................................... 37 Contacts Author Information ....................................................................................................... 46 Congressional Research Service Canada-U.S. Relations Introduction History, proximity, commerce, and shared values underpin the relationship between the United States and Canada. Americans and Canadians fought side by side in both World Wars, Korea, and Afghanistan, and the United States and Canada continue to collaborate on various international political and security matters, such as the campaign against the Islamic State. The countries also share mutual security commitments under the North Atlantic Treaty Organization (NATO),NATO; cooperate on continental defense through the binational North American Aerospace Defense Command (NORAD),; maintain a close intelligence partnership through the "Five Eyes"intel igence partnership as members of the “Five Eyes” group of nations,; and coordinate frequently on law enforcement efforts, with a particular focus on securing their shared 5,500525-mile border.

Bilateral 1 Bilateral economic ties, which were already considerable, have deepened markedly over the past three decades as trade relations have been governed . Trade and investment relations during this period were governed first by the 1989 by the 1989 U.S.-Canada Free Trade Agreement and, since 1994, subsequently by the 1994 North American Free Trade Agreement (NAFTA). Canada is the second; the new United States-Mexico-Canada Agreement (USMCA) has guided the economic partnership since its entry into force on July 1, 2020.2 Canada is the third-largest goods -largest trading partner of the United States, with total two-way cross-border goods and services trade amounting to over $1.6 billion per day in 2017.more than $525 bil ion in 2020.3 The United States is also the largest investor in Canada, whileand Canada is an important source of foreign direct investment in the United States. The countries have a highly integrated energy market, withand Canada beingis the largest supplier of U.S. energy imports. Unlike many countriesenergy imports and the largest recipient of U.S. energy exports.

Unlike with 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. For more than 60 years, the U.S. Congress has engaged directly with the Canadian Parliament through the Canada-United States Inter-Parliamentary Group (see textbox below). Initiatives between the states and provinces also are common, such as California and Quebec’s linked greenhouse-gas (GHG) emissions trading market under the Western Climate Initiative and various other initiatives to manage transboundary environmental and water issues. Canada-United States Inter-Parliamentary Group Since 1959, the U.S. Congress and the Canadian Parliament have maintained an Inter-Parliamentary Group (IPG) to foster mutual understanding and discuss bilateral and multilateral matters of concern to both countries. The IPG includes bipartisan representatives of the U.S. House and Senate and multiparty representatives of the Canadian House of Commons and Senate. Members historical y have met annual y, with the location alternating between the United States and Canada; however, more than 2½ years have passed since the last annual meeting (the 56th), held in Ottawa in June 2018. Notes: For more on the IPG, see P.L. 86-42, at https://uscode.house.gov/statutes/pl/86/42.pdf; H. Rept 86-215; and Parliament of Canada, “Canada-United States Inter-Parliamentary Group,” at https://www.parl.ca/diplomacy/en/associations/ceus. Nevertheless, with a population and economy one-tenth the size of the United States, Canada has sought to protect its autonomy and chart its own course in the world while maintaining 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 1 In addition to the United States and Canada, the “Five Eyes” intelligence alliance includes Australia, New Zealand, and the United Kingdom. 2 Often referred to as the Canada-U.S.-Mexico Agreement (CUSMA) in Canada. 3 U.S. Census Bureau, “U.S. International T rade in Goods and Services – December 2020,” February 5, 2020. Congressional Research Service 1 Canada-U.S. Relations much sovereignty to the United States, whereas others embrace a more North American approach to Canada’s neighborly relationship. Policy differences, such as Canada’Initiatives between the provinces and states are also common, such as the 2013 Pacific Coast Action Plan on Climate and Energy among California, Oregon, Washington, and British Columbia, or various initiatives to manage transboundary environmental and water issues.

Nevertheless, bilateral relations have been strained from time to time by individual matters, such as Canada's decision not to participate in the Iraq war in 2003 and the Obama Administration'’s rejection of the Keystone XL pipeline in 2015. Although the in 2015, have strained bilateral relations from time to time. The Canadian government welcomed the Trump Administration's March 2017 decision to revive President Trump’s revival of Keystone XL, but several other areas of contention have emergedemerged during his Administration. Canadian officials expressed particular frustration withofficials have been particularly frustrated by the Trump Administration's approach to renegotiating NAFTA and other trade disputes, such as the Administration's decision to impose tariffs on Canadian steel and aluminum. U.S. policy shifts also have affected the opinions of Canadian citizens, 76% of whom disapproved of the "job performance of the leadership of the United States" in 2017.¹ This could hinder efforts to conclude bilateral agreements or obtain Canadian support for U.S. initiatives moving forward.

Political Situation

Canada is a constitutional monarchy with Queen Elizabeth II as sovereign. In Canadian affairs, she is represented by a Governor-General (since October 2017, Julie Payette)’s trade policies, including its approach to USMCA negotiations and its decision to impose tariffs on Canadian steel and aluminum on national security grounds. Canadian officials also expressed concerns about the Trump Administration’s withdrawal from the Paris Agreement on climate change and its broader questioning of the multilateral institutions and rules that have helped to govern international relations since the end of World War II. The Trump Administration’s policies appear to have contributed to a significant shift in Canadian public opinion, as the percentage of Canadians holding favorable views of the United States declined by 30 percentage points between 2016 and 2020.4 President Joe Biden spoke with Prime Minister Justin Trudeau during his first cal with a foreign leader, highlighting the strategic importance of the U.S.-Canada relationship.5 Although both leaders cal ed for reinvigorating bilateral cooperation, they are likely to contend with policy differences on a range of issues. For example, Prime Minister Trudeau and other Canadian officials already have expressed disappointment with President Biden’s decision to revoke a presidential permit for the Keystone XL pipeline.6 The Biden Administration also may face lingering doubts among Canadians regarding the United States’ reliability as a long-term partner. This report presents an overview of Canada’s political situation, foreign and defense policies, and economic and trade policies, focusing particularly on issues that may be relevant to U.S. policymakers. It also examines several environmental and transboundary issues that may be of interest to Members of the 117th Congress. Politics and Governance Canada is a constitutional monarchy and a parliamentary democracy. Queen Elizabeth II is the head of state; she is represented in Canadian affairs by a governor-general, who is appointed on the advice of the prime minister. The Canadian government is a parliamentary democracy with a and carries out certain constitutional, ceremonial, and representational duties. Canada’s bicameral Westminster-style Parliament that includes an elected, 338-seat House of Commons and an appointed, 105-seat Senate. Members of Parliament are elected from individual districts ("ridings"ridings) under a first-past-the-post system, which only requires a plurality of the vote to win a seat. The governor-general typical y cal s upon the party winning the most seats typically is called upon to form a government. A government lasts as long as it can command a parliamentary majority for its policies, for a maximum of four years. Under Canada's 10 provinces and 3 territories are each’s federal system, the national government shares power and authority with 10 provinces and three territories, each of which is governed by a unicameral assembly.

Justin Trudeau was sworn in as Canada's prime minister on November 4, 4 Richard Wike, Janell Fetterolf, and Mara Mordecai, “U.S. Image Plummets Internationally as Most Say Country Has Handled Coronavirus Badly,” Pew Research Center, September 15, 2020. 5 White House, “Readout of President Joe Biden Call with Prime Minister Justin T rudeau of Canada, ” January 22, 2021. 6 Justin T rudeau, Prime Minister of Canada, “Prime Minister Justin T rudeau Speaks with the President of the United States of America Joe Biden,” January 22, 2021. Congressional Research Service 2 link to page 41 link to page 39 Canada-U.S. Relations Liberal Majority Government: 2015-2019 Justin Trudeau has served as Canada’s prime minister since November 2015. His Liberal Party 2015. His Liberal Party won a majority in the House of Commons in October 2015 parliamentary elections, defeating Prime Minister Stephen Harper'’s Conservative Party, which had held power for nearly a decade. The Liberals'’ dominant position in the House of Commons has enabled them to implement much of their campaign platform, including measures intended to foster inclusive economic growth, address climate change, and reorient Canada's foreign policy. Nevertheless, Trudeau's approval rating has declined substantially since early 2017 and the Liberal Party is now polling slightly behind the Conservatives. The next federal election is due by October 2019.

2015 Parliamentary Elections

In the end, the Liberals won 184 seats in the House of Commons, up from 34 in 2011, the largest seat gain in Canadian history. In addition to sweeping all 32 seats in the Atlantic Provinces, the Liberal Party dominated in the Toronto metropolitan area, regained its footing in Quebec, won the most seats in British Colombia since 1968, and won two seats in the Conservative stronghold of Calgary (see Figure 1). The Conservatives won 99 seats, down from 166 in 2011, and now serve as the Official Opposition. The NDP won 44 seats, well above its historic average, but a significant decline from the 103 seats it won in 2011. The separatist Bloc Québécois won 10 seats and the Green Party retained a single seat.

Figure 1. Map of Canada's 2015 General Election Results

Source: CRS. Data from Elections Canada, "Official Voting Results: Forty Second General Election," 2015. Notes: As of May 2018, the Liberal Party held 183 seats, the Conservatives held 96 seats, the NDP held 43 seats, the Bloc Québécois held 3 seats, and the Green Party held 1 seat. The Groupe Parlementaire Québécois, which broke away from the Bloc, held seven seats, independents held three seats, and two seats were vacant.

Trudeau Government

Trudeau enjoyed high levels of public support during his first year in office, but his approval rating has declined substantially since early 2017, averaging about 41% in recent polls.⁹ In addition to the policy disagreements discussed above, a series of Liberal Party ethics scandals appear to have tarnished Trudeau's image as someone who would bring a fresh approach to politics.¹⁰ In December 2017, for example, Canada's Ethics Commissioner ruled that Trudeau had contravened the country's Conflict of Interest Act by accepting two paid family vacations from a wealthy philanthropist whose foundation had received funding from the Canadian government.¹¹ Trudeau also has begun to face more scrutiny from the political opposition. The Conservative Party elected Andrew Scheer, a 39-year-old Member of Parliament from Saskatchewan, as its new leader in May 2017, and the NDP elected Jagmeet Singh, a 39-year-old former Member of Ontario's Provincial Parliament, as its new leader in October 2017. According to an average of recent polls, 37.2% of Canadians support the Conservatives while 34.8% support the Liberals, 17.4% support the NDP, 6.1% support the Green Party, and 3.4% support the Bloc Québécois.¹²

Foreign and Security Policy

Canada views a rules-based international order as essential for enabled them to implement much of their campaign platform. During its first four years in office, the Liberal government enacted a tax cut for middle-income families, created a new child benefit to help with the cost of raising children, and increased pension and parental leave benefits. The Liberal government also legalized cannabis consumption and worked with Canada’s provinces and territories to develop a national climate change plan that imposed a price on carbon emissions. Although Prime Minister Trudeau and the Liberals initial y enjoyed high levels of public support, their approval ratings gradual y declined as they abandoned some campaign pledges, such as electoral reform, and sought to balance competing policy priorities. For example, the Liberals enacted a carbon tax to reduce GHG emissions but also supported several pipeline projects to transport Canadian oil sands to overseas markets (see “Climate Change” and “Energy,” below); those efforts to reconcile Canada’s Paris Agreement commitments with its role as a major fossil fuel producer drew criticism from energy producers and environmentalists. A series of ethics scandals further eroded public support for the Liberal government. In December 2017, Canada’s conflict of interest and ethics commissioner ruled that Prime Minister Trudeau had contravened the country’s Conflict of Interest Act by accepting two paid family vacations from a wealthy philanthropist whose foundation had received funding from the Canadian government.7 Prime Minister Trudeau was found to have contravened the act again in August 2019 for attempting to influence a decision of the attorney general of Canada regarding a potential criminal prosecution of the Montreal-based engineering company SNC-Lavalin.8 2019 Election The Liberals entered the 2019 election campaign facing increased public scrutiny and polling neck and neck with the opposition Conservatives. With unemployment near a 40-year low, the Liberal Party highlighted its legislative accomplishments and argued the election was about whether or not Canada would “keep moving forward.”9 Many Canadians remained concerned about cost-of-living issues, however, and Conservative Party leader Andrew Scheer pledged to help Canadians “get ahead.”10 He argued the Liberal government’s carbon tax had made necessities more expensive and claimed four years of deficit spending had failed to improve Canadians’ lives. The Liberal Party also faced pressure from its left, with the New Democratic Party (NDP) and the Green Party seeking to win over progressive voters disenchanted with Prime Minister Trudeau’s ethics violations and the Liberal Party’s lack of follow-through on some of its more far-reaching 2015 campaign pledges. In the end, the Liberals won 157 ridings, leaving the party 13 seats shy of a majority. The Liberal Party’s vote share declined in every province and territory compared with 2015. It lost 29 seats 7 Mary Dawson, Conflict of Interest and Ethics Commissioner, Trudeau Report, December 2017. 8 Mario Dion, Conflict of Interest and Ethics Commissioner, Trudeau II Report, August 2019. 9 Jason Kirby, “Election 2019 Primer: Jobs, the Economy and the Deficit,” Macleans, September 12, 2019; and Liberal Party of Canada, Forward: A Real Plan for the Middle Class, September 2019. 10 Bruce Anderson and David Coletto, “Election 2019 Is a Battle to Define the Agenda,” Abacus Data, July 15, 2019; and Conservative Party of Canada, “Andrew Scheer Launches Campaign to Help You Get Ahead,” September 11, 2019. Congressional Research Service 3 link to page 8 Canada-U.S. Relations across the country, including the party’s only footholds in the oil-producing provinces of Alberta and Saskatchewan. The Conservative Party won a plurality of al votes cast nationwide but failed to make significant gains in Quebec and Ontario, which hold nearly 60% of the seats in the House of Commons (see Figure 1). As a result, the Conservatives remain the Official Opposition, with 121 seats. The Bloc Québécois, which promotes Quebec sovereignty, surged to a third-place finish by winning 32 seats in the province. The Bloc’s gains came largely at the expense of the NDP, which won 24 seats. The Green Party won three seats, and Prime Minister Trudeau’s former attorney general, who resigned after accusing the prime minister of inappropriate intervention in the SNC-Lavalin case, won reelection to parliament as an independent. Figure 1. Map of Canada’s 2019 Federal Election Results Source: CRS. Data from Elections Canada, “Official Voting Results: Forty-Third General Election,” 2019. Minority Government and Pandemic Response Prime Minister Trudeau has presided over a minority government since the start of the 43rd Parliament in December 2019. As the new term began, it appeared the government’s primary chal enge would be to develop policies that would further reduce Canada’s GHG emissions while maintaining economic growth and addressing an increasing sense of political alienation in the country’s western oil-producing provinces.11 The Liberals’ other stated policy priorities included a new tax cut for middle-income families, more stringent gun controls, an expansion of Canada’s 11 Grant Wyeth, “How Climate Change Could T ear Canada Apart,” World Politics Review, February 13, 2020. Congressional Research Service 4 link to page 9 Canada-U.S. Relations universal health care system to cover prescription drugs, and reconciliation with indigenous peoples.12 Many of those issues were set aside, however, with the onset of the Coronavirus Disease 2019 (COVID-19) pandemic. The Canadian government confirmed the first documented infection in the country on January 27, 2020, and recorded the first death from the disease on March 9, 2020. By late March 2020, the Trudeau government had closed Canada’s borders to most nonresidents and imposed a mandatory 14-day quarantine for individuals returning to the country. The federal government also coordinated with provincial and territorial governments—which have jurisdiction over health care—to secure personal protective equipment and other medical supplies and to scale up the country’s testing and contact-tracing capabilities. The provinces and territories have imposed (and lifted) containment measures in accordance with local conditions and the federal government’s broad public health guidelines. Figure 2. Confirmed Cases of COVID-19 in Canada (new cases by date reported [March 15, 2020-February 9, 2021]) Source: CRS, Data from Public Health Agency of Canada, “Public Health Infobase - Data on COVID-19 in Canada,” February 10, 2021. Analysts credited those coordinated efforts for initial y slowing the spread of the virus (see Figure 2). Although provincial health services reportedly experienced some supply shortages, they had sufficient capacity to handle the first wave of infections.13 As conditions improved, provincial and territorial governments implemented phased reopening plans that al owed children 12 Government of Canada, “Moving Forward T ogether: Speech from the T hrone to Open the First Session of the 43 rd Parliament of Canada,” September 5, 2019. 13 Marieke Walsh and Nathan Vanderklippe, “Provinces Compete for Critical Medical Supplies,” Globe and Mail, April 7, 2020; and Allen S. Detsky and Isaac I. Bogoch, “COVID-19 in Canada: Experience and Response,” Journal of the Am erican Medical Association (JAMA), vol. 324, no. 8 (August 25, 2020), pp. 743 -744. Congressional Research Service 5 Canada-U.S. Relations to return to school and loosened restrictions on many business and recreational activities. A second, larger wave of infections swept through Canada in late 2020, however, leading provinces to reimpose restrictions. As of February 9, 2021, Canada had registered nearly 811,000 cases and 21,000 deaths from COVID-19.14 The country’s COVID-19 daily case rate (9.4 new cases per 100,000 residents) was less than one-third of that of the United States (33 new cases per 100,000 residents).15 The Trudeau government has worked with Parliament to mitigate the economic impact of the pandemic and public health measures. Among other programs, the government created the Canada Emergency Response Benefit, which provided C$2,000 (approximately $1,538) every four weeks to workers who lost their incomes due to COVID-19, and the Canada Emergency Wage Subsidy, which covered 75% of employees’ wages, up to C$847 (approximately $652) per week, for businesses that have lost a certain amount of revenue.16 The emergency response benefit original y was to provide up to 16 weeks of assistance, but the Canadian government extended the program to 28 weeks. In September 2020, beneficiaries began transitioning into a newly expanded employment insurance system; self-employed and gig workers who do not qualify for employment insurance are eligible for a new C$500 (approximately $385) per week Canada Recovery Benefit until September 2021. The Canadian government also extended the wage subsidy program, original y scheduled to expire in June 2020, through June 2021.17 Prime Minister Trudeau laid out a revised vision for his second term in September 2020, which was fleshed out in the government’s Fall Economic Statement 2020. The Liberal government’s top priorities are combatting the pandemic and helping Canadians through the crisis. Among other measures, Prime Minister Trudeau pledged to help provinces increase testing, ensure Canadians have access to vaccines and therapeutics, and provide continued financial support to individuals and businesses affected by the pandemic and government containment measures. The Canadian government has signed agreements with seven vaccine suppliers for enough doses to vaccinate the Canadian population nearly six times over. Production delays have slowed distribution, however, and only 2.7% of the Canadian population had received at least one vaccine dose as of early February (compared with 10.2% of the U.S. population).18 Following the immediate crisis, the Liberals argue Canada should take advantage of low interest rates to finance economic stimulus measures and address longer-term concerns, such as climate change and gaps in Canada’s social assistance systems.19 The prime minister wil need to secure the support of opposition parties to enact his agenda. Although Erin O’Toole, the newly elected leader of the Conservative Party, has dismissed many of Prime Minister Trudeau’s proposals, 14 Government of Canada, Public Health Infobase, “Interactive Data Visualizations of COVID-19,” February 10, 2021. Data are updated regularly at https://health-infobase.canada.ca/covid-19/. 15 “COVID World Map: T racking the Global Outbreak,” New York Times, February 10, 2021. Data are updated regularly at https://www.nytimes.com/interactive/2020/world/coronavirus-maps.html. 16 Currency conversions throughout this report are based on the average exchange rate from September 14, 2020, to January 15, 2021, of C$1.3/U.S.$1. Data from the Board of Governors of the Federal Reserve, “ Foreign Exchange Rates,” January 19, 2021. 17 Department of Finance Canada, “Canada’s COVID-19 Economic Response Plan,” September 28, 2020; and Canada Revenue Agency, “Canada Emergency Wage Subsidy (CEWS),” November 23, 2020. 18 Government of Canada, “Procuring Vacines for COVID-19,” February 9, 2021; and “Canada Politics: Quick View – Vaccine Shortages Slow Rollout,” Economist Intelligence Unit, February 4, 2021. 19 Government of Canada, “A Stronger and More Resilient Canada: Speech from the T hrone to Open the Second Session of the 43rd Parliament of Canada,” September 23, 2020; and Department of Finance Canada, Supporting Canadians and Fighting COVID-19: Fall Econom ic Statem ent 2020, November 30, 2020. Congressional Research Service 6 link to page 16 Canada-U.S. Relations NDP leader Jagmeet Singh has indicated his party is prepared to provide political support to the Liberal government as long as the government supports NDP priorities, such as paid sick leave.20 The Liberals wil need to maintain the NDP’s support or offset it with support from the Bloc Québécois or the Conservative Party to avoid a snap election; recent minority governments have lasted just over two years, on average.21 Popular support for the Liberal Party initial y increased during the pandemic but declined somewhat after Canada’s conflict of interest and ethics commissioner launched an investigation in July 2020 into the government’s decision to award a contract to a charity with ties to the prime minister’s family.22 As of February 8, 2021, polls suggested 35% of Canadians would support the Liberals in a new election, 30% would support the Conservatives, 18% would support the NDP, nearly 7% would support the Bloc Québécois, and 6% would support the Green Party.23 Foreign and Defense Policy Canada views the rules-based international order that it helped establish with the United States and other al ies in the aftermath of World War II as essential to its physical security and economic prosperity. According to Deputy Prime Minister and Minister of Finance Chrystia Freeland, who served as minister of foreign affairs from 2017 to 2019, “As a middle power living next to the world’s only super power, Canada has a huge interest in an international order based on rules. One in which might is not always right. One in which more powerful countries are constrained in their treatment of smal er ones by standards that are international y respected, enforced and upheld.”24 Historical y, Canada has sought to increase its influence over the shape of the international order through multilateral diplomacy and contributions to collective security al iances. its physical security and economic prosperity. Historically, the country has sought to promote international peace and stability by leveraging its influence through alliance commitments and multilateral diplomacy.¹³ Although the Although the Harper government broke with its predecessors to a certain extent, demonstratingexpressing more skepticism toward the United Nations and other international organizations, Prime Ministertoward multilateral institutions and a greater willingness to engage in unilateral actions, Trudeau has Trudeau has restored Canada'’s traditional approach to foreign affairs.25 Over the past four years, much of Prime Minister Trudeau’s time and attention has focused on managing relations with the United States. Maintaining smooth bilateral relations is typical y a top priority for Canadian governments, since Canada depends on access to the U.S. market and benefits from U.S. investments in continental defense (see “U.S.-Canada Security Cooperation”). That task grew more difficult during the Trump Administration, however, which chal enged many long-standing pil ars of the U.S.-Canada relationship. In addition to renegotiating NAFTA, President Trump raised doubts about the U.S. commitment to NATO and withdrew from multilateral institutions and agreements that both countries previously supported. Prime Minister Trudeau general y sought to avoid direct confrontations with the Trump Administration, but tensions boiled over on a few occasions. In June 2018, for example, President Trump and 20 Althia Raj, “Jagmeet Singh: NDP Could Prop Up Liberal Government for Another 3 Years,” HuffPost Canada, September 26, 2020. 21 Geoff Norquay, “Is Canada Headed T oward Another Minority Government?,” Policy Options, September 19, 2019. 22 “T he WE Charity Controversy Explained,” CBC News, July 28, 2020. 23 T hese vote projections are from a model that averages all publicly available opinion polls, weighted by age, sample size, and past performance of the polling firm. Éric Grenier, “ Poll T racker,” CBC News, February 8, 2021. 24 Global Affairs Canada, “Address by Minister Freeland on Canada’s Foreign Policy Priorities,” June 6, 2017. 25 John Ibbitson, The Big Break: The Conservative Transformation of Canada’s Foreign Policy, Centre for International Governance Innovation, CIGI Papers No. 29, April 2014. Congressional Research Service 7 link to page 38 link to page 31 link to page 14 link to page 13 Canada-U.S. Relations Administration officials made disparaging remarks about Trudeau after the prime minister announced his intention to impose retaliatory tariffs on U.S. goods in response to the Trump Administration’s decision to impose national security tariffs on Canadian steel and aluminum (see “Steel and Aluminum Tariffs,” below).26 U.S.-Canada relations have improved since the conclusion of USMCA negotiations, but many Canadians question whether the United States remains a reliable partner.27 The Trudeau government has sought to reduce Canada’s dependence on the U.S. market by concluding free trade agreements (FTAs) with the European Union and 10 countries in the Asia-Pacific region (see “Canada’s Network of Free Trade Agreements,” below). Although the Trudeau government also explored a potential FTA with China, talks were suspended due to a sharp deterioration in relations (see “Relations with China,” below). Amid perceptions that the United States seeks to “shrug off the burden of global leadership,” the Trudeau government has sought to work with like-minded countries to uphold the rules-based international order.28 In 2019, for example, Canada joined a coalition of countries led by France and Germany to launch the Al iance for Multilateralism—an informal network that seeks to protect and preserve international norms, agreements, and institutions; address new chal enges that require collective action; and reform multilateral institutions and agreements to ensure they deliver tangible results to citizens. Canada also is leading a smal coalition of World Trade Organization (WTO) members, known as the Ottawa Group, to reform the multilateral trading system. As part of its broader efforts to uphold the rules-based order, the Trudeau government has reaffirmed Canada’s commitment to collective security efforts. It unveiled a new defense policy in 2017, which asserts that defending Canada and Canadian interests “not only demands robust domestic defense but also requires active engagement abroad.”29 Among other deployments, Canada is contributing to the U.S.-led coalition in Iraq and to NATO’s deterrence operations in Eastern Europe (see “NATO Commitments”). Although Prime Minister Trudeau pledged to increase Canada’s support for U.N. peacekeeping missions, his government’s contributions have been fairly limited, with the exception of a 13-month deployment of a 250-member air task force to Mali.30 Some analysts have linked Canada’s failed bid for a temporary seat on the U.N. Security Council for the 2021-2022 term, in part, to the country’s comparatively smal contributions to global peacekeeping and development efforts.31 26 Michael D. Shear and Catherine Porter, “Trump Refuses to Sign G-7 Statement and Calls T rudeau ‘Weak,’” New York Tim es, June 9, 2018; and Patrick T emple-West, “ White House Ratchets Up T rade War with ‘Special Place in Hell’ Slug at T rudeau,” Politico, June 10, 2018. 27 Jamie Gillies and Shaun Narine, “T he T rudeau Government and the Case for Multilateralism in an Uncertain World,” Canadian Foreign Policy Journal, vol. 26, no. 3 (2020), pp. 257-275; Richard Nimijean and David Carment, “Rethinking the Canada-U.S. Relationship After the Pandemic,” Policy Options, May 7, 2020; and Steven Chase, “More Canadians Hold an Unfavourable View of the U.S. T han at Any Point Since Sentiment Was First T racked, Poll Indicates,” Globe and Mail, October 15, 2020. 28 Global Affairs Canada, “Address by Minister Freeland on Canada’s Foreign Policy Priorities,” June 6, 2017. 29 Department of National Defence, Strong, Secure, Engaged: Canada’s Defence Policy, June 2017, p. 14. 30 Department of National Defence, “Canadian Armed Forces Conclude Peacekeeping Mission in Mali,” press release, August 31, 2019; and Mike Blanchfield, “Canada’s Peacekeeping Contribution at Lowest Level in More T han 60 Years,” Globe and Mail, May 23, 2020. 31 Bruno Charbonneau and Christian Leuprecht, “When Will Canada Hear the Message the UN Keeps Sending Us?,” Globe and Mail, June 19, 2020; and “ Canada Loses Out on UN Security Council Seat Bid,” Econom ist Intelligence Unit, June 30, 2020. Congressional Research Service 8 Canada-U.S. Relations NATO Commitments s traditional approach to foreign affairs.¹⁴ His government quickly reemphasized multilateral engagement by ratifying the Paris Agreement on climate change and announcing Canada's bid for a temporary seat on the U.N. Security Council for the 2021-2022 term. In June 2017, Canadian Foreign Minister Chrystia Freeland asserted that Canada must set its "own clear and sovereign course" to renew and strengthen the international order given that the United States appeared to be withdrawing from its global leadership role.¹⁵ President Trump's actions at the June 2018 Group of Seven (G-7) meeting have reinforced Canadian concerns about the U.S. government's commitment to the rules-based, multilateral system (see text box below).

NATO Commitments

Canada, like the United States, was a founding member of NATO in 1949. It maintained a Canada, like the United States, was a founding member of NATO in 1949. It maintained a military presence in Western Europe throughout the Cold War in support of the collective defense pact. Since the 1990s, Canada has supported efforts to restructure NATONATO’s adaptation and has been an active participant in a number ofnumerous NATO operations, including the 1992 intervention in Bosnia and Herzegovina, the 1999 bombing campaign in Serbia, and the 2011 intervention in Libya. Canada also contributed the fifth-largest national contingent to the NATO-led International Security Assistance Force (ISAF) in Afghanistan, before withdrawing in 2014.

Canada was an advocate for NATO enlargement, Canada commanded NATO Mission Iraq from its October 2018 inception until November 2020. The mission aims to strengthen Iraqi security institutions and forces by providing noncombat advisory, training, and capacity-building support to Iraqi defense officials and military personnel. Those efforts complemented Canada’s broader contributions to the U.S.-led coalition to defeat the Islamic State. Although Prime Minister Trudeau withdrew Canada’s fighter aircraft from Iraq shortly after taking office, he has deployed up to 850 troops to the Middle East to support coalition air operations; provide intel igence support; and train, advise, and assist Iraqi security forces.32 Canada and other NATO and coalition partners have repositioned many personnel outside of Iraq since early 2020 due to a deterioration in the security situation and the COVID-19 pandemic.33 Although some troops may return to the Middle East once conditions improve, Canada intends to reduce its overal presence in the region.34 Canada has been an advocate for NATO enlargement and has deployed Canadian Armed Forces personnel to Central and Eastern Europe in support of the newest members of the allianceal iance. In June 2017, Canada took command of a 1,000-strong NATO battle group deployed to Latvia to enhance the alliance's forward presence as part of the al iance’s Enhanced Forward Presence in Eastern Europe. The 1,500-strong battle group includes 450 540 members of the Canadian Armed Forces, as well wel as troops from Albania, Italythe Czech Republic, Italy, Montenegro, Poland, Slovakia, Slovenia, and Spain. The United States, the United Kingdom, and Germany are commandingcommand similar forces in Poland, Estonia, and Lithuania, respectively, as part of a broader effort to reassure the alliance'al iance’s eastern members and bolster deterrence in the aftermath of Russia's annexation of Crimea and incursion into Ukraine. Canada also has deployed a maritime task force of one frigate to the Eastern Mediterranean to support NATO activities.¹⁸

Under the Trudeau government's new defense policy, Canada's total defense spending would reach 1.4%’s annexation of Crimea. Canada also commands a standing NATO maritime group that operates in Western and Northern European waters.35 Under the Trudeau government’s defense policy, Canada is to increase defense spending by 73% in nominal terms over 10 years to reach C$32.7 bil ion (approximately $25.2 bil ion) in 2026- 2027. Canada intends to use the additional resources to acquire new aircraft, ships, and other equipment; expand the Canadian Armed Forces by 3,500 personnel; and invest in new capabilities.36 If implemented, Canada’s total defense spending as a percentage of gross domestic product (GDP) would reach 1.4% in 2024-2025, which would fall fal wel short of NATO's recommended level of at least 2% of GDP. Nevertheless, Canada would exceed NATO'’s 32 Department of National Defence, “Operation IMPACT ,” December 15, 2020; and NAT O, “NAT O Mission Iraq,” October 29, 2020. 33 NAT O and other coalition operations were suspended temporarily in January 2020 following the U.S. killing of Qasem Soleimani, the commander of Iran’s Islamic Revolutionary Guard Corps-Quds Force, and subsequent Iranian missile attacks against Iraqi bases hosting U.S. and coalition forces. Following the U.S. strike against Soleimani, Iran shot down a civilian aircraft, killing all 176 people aboard, including 55 citizens and 30 permanent residents of Canada. 34 Lee Berthiaume, “Canadian Military Shrinks Middle East Footprint as ISIL Fight Enters New Phase,” Canadian Press, July 29, 2020. 35 Department of National Defence, “Operation REASSURANCE,” January 18, 2021; and NAT O, “NAT O’s Enhanced Forward Presence,” fact sheet, October 2019. 36 Department of National Defence, Strong, Secure, Engaged: Canada’s Defence Policy, June 2017, p. 13. Congressional Research Service 9 Canada-U.S. Relations recommended level of at least 2% of GDP. Nevertheless, Canada would exceed NATO’s target of investing 20% of defense expenditure in major equipment; such investments would reach 32% of defense spending in 2024-2025.¹⁹ Although successive U.S. Administrations have pushed Canada to meet the 2% of GDP target, Canada has long maintained that defense expenditure as a percentage of GDP is not a good measure for determining actual military capabilities or contributions to the NATO alliance.

Participation in Coalition to Combat the Islamic State²⁰

The Trudeau government has sought to complement Canada's military operations with political and humanitarian efforts in the region. It has pledged to provide C$1.6 billion (about $1.2 billion) in security, stabilization, humanitarian, and development assistance over three years to address the crises in Iraq and Syria as well as their impact on Jordan and Lebanon.²⁴ The Trudeau government also has sought to assist those who have been displaced by the conflict, resettling nearly 53,000 Syrian refugees between November 2015 and March 2018.²⁵ Nearly 1,000 Yazidis and other survivors of Islamic State violence were resettled in Canada in 2017.²⁶

U.S.-Canada Defense Relations

NORAD

Ballistic Missile Defense

F-35 Joint Strike Fighter Program³⁶

Border Security

The United States and Canada maintain a close intelligence partnership and coordinate frequently on law enforcement efforts, with a particular focus on securing the border since the September 11, 2001, terrorist attacks. Under the Beyond the Border declaration, signed in 2011, both nations agreed to negotiate 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 coordinated steps to strengthen and protect critical infrastructure.⁴³ The declaration led to a 2016 accord to exchange 37 In 2020, partial y due to the sharp economic downturn, Canada’s estimated defense expenditures reached approximately 1.45% of GDP, with 17.4% of expenditures dedicated to equipment.38 Although the pandemic-driven economic downturn could put pressure on Canada’s defense budget, Defense Minister Harjit Saj an maintains that expenditures are moving forward as planned.39 Successive U.S. Administrations have pushed Canada to meet the NATO target, but Canada has long argued that countries’ contributions to the al iance should be measured more by the capabilities and troops they provide than by their defense expenditures as a percentage of GDP. Relations with China Prime Minister Trudeau’s government came to office intending to strengthen ties with China. It argued that deeper commercial ties with China were necessary to increase Canada’s long-term economic growth and diversify the country’s trade relations. The United States is the destination of about 73% of Canada’s global merchandise exports,40 and the Trump Administration’s trade policies reinforced long-standing concerns that Canada is overly dependent on the U.S. market. During Prime Minister Trudeau’s first years in office, Canada joined the China-backed Asian Infrastructure Investment Bank and al owed Chinese companies to acquire some Canadian businesses in sensitive sectors.41 Canada also increased its diplomatic engagement with China and engaged in exploratory discussions regarding an extradition treaty and an FTA.42 Chinese-Canadian relations have deteriorated significantly since December 2018, when Canada arrested Meng Wanzhou, an executive at the Chinese technology company Huawei, to comply with an extradition request from the United States. A trial to determine whether Meng is to be extradited to the United States has been underway since January 2020. The U.S. Department of Justice indicted Meng and Huawei for financial fraud involving violations of U.S. sanctions on Iran.43 In apparent retaliation for Meng’s arrest, China detained two Canadians, Michael Kovrig, a former diplomat, and Michael Spavor, in December 2018. China has held the men in state custody for over two years, charging them with espionage in June 2020.44 China also restricted imports of certain Canadian agricultural products. Although Chinese officials maintain that Canada must ensure Meng’s safe return to China to avoid further damage to bilateral relations, 37 Department of National Defence, Strong, Secure, Engaged: Canada’s Defence Policy, June 2017. p. 46. 38 NAT O, “Defence Expenditure of NAT O Countries (2013 -2020),” Communique PR/CP(2020)104, October 21, 2020. 39 Lee Berthiaume, “Hundreds of Billions of Planned Military Spending ‘Secure’ Despite COVID-19: Sajjan,” Canadian Press, September 15, 2020. 40 Statistics Canada data, as presented by Trade Data Monitor, accessed February 2021. 41 For more on the bank, see CRS In Focus IF10154, Asian Infrastructure Investment Bank, by Martin A. Weiss. 42 Preston Lim, “Sino-Canadian Relations in the Age of Justin T rudeau,” Canadian Foreign Policy Journal, vol. 26, no. 1 (2020). 43 U.S. Department of Justice, “Chinese T elecommunications Conglomerate Huawei and Huawei CFO Wanzhou Meng Charged with Financial Fraud,” press release, January 28, 2019. 44 Ministry of Foreign Affairs of the People’s Republic of China, “Foreign Ministry Spokesperson Zhao Lijian’s Regular Press Conference,” June 19, 2020; and Global Affairs Canada, “ T wo Years Since Canadians Michael Kovrig and Michael Spavor Arbitrarily Detained in China,” December 9, 2020. Congressional Research Service 10 Canada-U.S. Relations Prime Minister Trudeau has criticized China’s “coercive diplomacy” and demanded the release of the incarcerated Canadians.45 The Trump Administration praised Canada for honoring the extradition treaty and upholding the rule of law and cal ed on China to end its “arbitrary detention of Canadian citizens.”46 The Senate and the House passed resolutions (S.Res. 96 and H.Res. 521, respectively, 116th Congress) expressing similar sentiments in 2019. Canadian officials expressed some frustrations, however, that the Trump Administration did not push more forcefully for the Canadians’ release.47 Tensions have escalated as Canada has pressed China on human rights issues. In May 2020, Canada joined with the United States, the United Kingdom (UK), and Australia to express “deep concern” about China’s decision to impose a new national security law on Hong Kong.48 Since then, Canada has suspended its extradition treaty with Hong Kong, placed restrictions on sensitive exports to Hong Kong, granted asylum to some Hong Kong democracy activists, and created a new class of work permit for Hong Kong residents. Canadian officials also have expressed concerns about China’s treatment of Uyghurs and other ethnic minorities in northwest China’s Xinjiang region. In October 2020, the House of Commons Subcommittee on International Human Rights asserted that the situation amounts to genocide and cal ed on the Canadian government to impose sanctions on the Chinese officials responsible.49 The Trudeau government has opted not to impose sanctions thus far, but it announced a series of measures in January 2021 intended to prevent goods produced through forced labor in Xinjiang from entering Canadian supply chains.50 The Chinese government has pushed back, urging Canada to “stop interfering in China’s internal affairs.”51 Human rights groups and Canadian officials maintain that Chinese government agents also have been directly and indirectly involved in harassment and intimidation against pro-democracy and human rights activists in Canada.52 The deterioration in relations could influence the Trudeau government’s decision regarding whether to al ow Huawei to participate in Canada’s fifth-generation (5G) telecommunications network. The Trump Administration argued that using Huawei equipment would leave Canada’s network vulnerable to espionage and sabotage, since the company ultimately answers to the Chinese government—a charge Huawei denies. Several of Canada’s top telecommunications companies use Huawei equipment in their existing networks and are concerned that excluding the 45 Nathan Vanderklippe, “China Shifts T one, T hreatens ‘Damage’ to Relations with Canada,” Globe and Mail, May 27, 2020; and Robert Fife and Steven Chase, “ PM Vows to Fight China’s ‘Coercive Diplomacy,’” Globe and Mail, October 14, 2020. 46 Robert Palladino, Deputy Spokesperson, “Canada’s Legitimate Arrest of Huawei CFO Meng Wanzhou,” U.S. Department of State, December 21, 2018; and Michael R. Pompeo, Secretary of State, “United States Stands with Canada Against China’s Arbitrary Detention of Canadian Citizens,” U.S. Department of State, June 22, 2020. 47 “Fed Up Canada T ells U.S. to Help with China Crisis or Forget About Favors,” Reuters, May 6, 2019. 48 U.S. Department of State, Office of the Spokesperson, “Joint Statement on Hong Kong,” May 28, 2020. 49 House of Commons, Subcommittee on International Human Rights of the Standing Committee on Foreign Affairs and International Development, “Statement by the Subcommittee on International Human Rights Concerning the Human Rights Situation of Uyghurs and Other T urkic Muslims in Xinjiang, China,” press release, October 21, 2020. 50 Global Affairs Canada, “Canada Announces New Measures to Address Human Rights Abuses in Xinjiang, China,” January 12, 2021. 51 Ministry of Foreign Affairs of the People’s Republic of China, “Foreign Ministry Spokesperson Zhao Lijian’s Regular Press Conference on October 22, 2020,” October 22, 2020. 52 Canadian Coalition on Human Rights in China and Amnesty International, Harassment & Intimidation of Individuals in Canada Working on China-Related Hum an Rights Concerns, March 2020; and Robert Fife and Steven Chase, “Beijing T argeting Canada’s Chinese Community, CSIS Says,” Globe and Mail, November 10, 2020. Congressional Research Service 11 Canada-U.S. Relations company would raise costs and delay the rollout of 5G technology.53 The Trudeau government has been conducting a national security review of the issue since September 2018 and has not issued a timeline for arriving at a decision. Canada is the only member of the Five Eyes al iance that has yet to block the use of Huawei equipment, and U.S. officials have warned their Canadian counterparts that the decision could affect intel igence and defense cooperation.54 According to a poll conducted in September 2020, 79% of Canadians view China as a moderate or serious threat to Canada.55 A provision of the FY2021 Intel igence Authorization Act (P.L. 116-260, Division W, §601) requires the directors of the Central Intel igence Agency, National Security Agency, and Defense Intel igence Agency to submit a joint report on attempts by China and other foreign adversaries to provide telecommunications and cybersecurity equipment and services to Five Eyes countries. The report is to assess U.S. intel igence and defense relationships with such countries and to consider the potential for mitigating risks posed by those relationships. U.S.-Canada Security Cooperation According to the U.S. State Department, “U.S. defense arrangements with Canada are more extensive than with any other country.”56 In addition to their mutual defense commitments under NATO and close intel igence partnership as members of the Five Eyes al iance, the United States and Canada cooperate on continental defense through NORAD and coordinate extensively on law enforcement matters, including border security and cybersecurity. North American Aerospace Defense Command NORAD is a cornerstone of U.S.-Canada defense relations. Established in 1958, NORAD original y was intended to monitor and defend North America against Soviet long-range bombers. The NORAD agreement has been reviewed and revised several times, however, to respond to changes in the international security environment. Today, NORAD’s mission consists of the following:  Aerospace Warning. Processing, assessing, and disseminating intel igence related to the aerospace domain and detecting, validating, and warning of attacks against North America, whether by aircraft, missiles, or space vehicles.  Aerospace Control. Providing surveil ance and exercising operational control over U.S. and Canadian airspace.  Maritime Warning. Processing, assessing, and disseminating intel igence related to the maritime areas and internal waterways of the United States and Canada, and warning of maritime threats to North America to enable response by national commands. NORAD is the only binational command in the world. The U.S. commander and the Canadian deputy commander of NORAD are appointed by, and responsible to, both the U.S. President and the Canadian prime minister. Likewise, NORAD headquarters at Peterson Air Force Base in 53 Alexandra Posadzki, Robert Fife, and Steven Chase, “Huawei’s 5G Role in Doubt as Bell, T elus Use European Suppliers,” Globe and Mail, June 3, 2020. 54 T he United States, the United Kingdom, and Australia have banned Huawei from their 5G networks. New Zealand has not issued a blanket ban, but it blocked an attempt by a telecomm unications company to use Huawei equipment. 55 Macdonald-Laurier Institute and Konrad Adenauer Stiftung, “Canada’s Role in the World – Part One,” November 2020. 56 U.S. Department of State, Bureau of Western Hemisphere Affairs, U.S. Relations with Canada, July 16, 2020. Congressional Research Service 12 Canada-U.S. Relations Colorado is composed of integrated staff from both countries. This binational structure al ows the United States and Canada to pool resources, avoiding duplication of some efforts and increasing North America’s overal defense capabilities. Nevertheless, because the U.S. and Canadian governments want to maintain their abilities to take unilateral action, some NORAD responsibilities and authorities overlap with those of U.S. Northern Command (NORTHCOM) and Canadian Joint Operations Command (CJOC). In 2017, President Trump and Prime Minister Trudeau agreed to modernize and broaden the NORAD partnership in the air, maritime, cyber, and space domains.57 NORAD officials maintain that the command must update its aging systems and develop new capabilities to deter, detect, and defeat emerging threats, such as stealthy air- and sea-launched cruise missiles and hypersonic glide vehicles.58 The U.S. and Canadian governments have yet to formalize agreements regarding specific expenditures or changes to the command’s approach to continental defense. The Trudeau government’s defense policy states that Canada wil make the investments necessary to fulfil the country’s NORAD obligations and wil work with the United States to ensure the command is able to meet existing and future chal enges. Among other initiatives, the policy cal s for Canada to purchase 88 fighter aircraft to replace its aging fleet of CF-18s and to collaborate with the United States to replace the North Warning System—a chain of unmanned radar stations in the Arctic that provides aerospace surveil ance along the northern approaches to the United States and Canada.59 Canada’s procurement process for advanced fighters has been delayed for more than a decade, and a final contract is not expected to be concluded until 2022.60 The repeated delays have led some analysts to question whether Canada wil be able to meet its NORAD commitments.61 Analysts also have questioned Canada’s decision not to participate in bal istic missile defense, which reportedly has complicated command and control by dividing the mission between NORAD, which is involved in missile detection and warning, and NORTHCOM, which is responsible for the U.S. bal istic missile defense system.62 Border Security The United States and Canada coordinate extensively on efforts to secure their shared 5,525-mile border. The 2011 “Beyond the Border” declaration and action plan provide the framework for ongoing bilateral cooperation, including efforts to address potential threats, facilitate legal commercial and passenger traffic, enhance cross-border law enforcement cooperation, and strengthen and protect critical infrastructure.63 The declaration and action plan have resulted in several initiatives, including 57 White House, Office of the Press Secretary, “Joint Statement from President Donald J. T rump and Prime Minister Justin T rudeau,” February 13, 2017. 58 T errence J. O’Shaughnessy and Peter M. Fesler, “Hardening the Shield: A Credible Deterrent & Capable Defense for North America,” Wilson Center, Canada Institute, September 2020. 59 Department of National Defence, Strong, Secure, Engaged: Canada’s Defence Policy, June 2017. 60 Canada has participated in the U.S.-led F-35 Joint Strike Fighter program since 1997, contributing $541 million to the consortium, but has yet to make a final decision on whether to purchase F-35s or alternative aircraft. 61 Laura Dawson, The Interim Fighter Capability Project and Its Importance to Canada ’s NORAD Mission, Wilson Center, Canada Institute, December 11, 2017; and Al Stephenson, Anatom y of a Buy: The Four Dim ensions of Procuring a Future Fighter for Canada, Canadian Global Affairs Institute, May 2019. 62 Michael Dawson, NORAD: Remaining Relevant, University of Calgary, School of Public Policy, November 2019; and NORAD Deputy Commander Lieutenant -General Pierre St -Amand, remarks before the House of Commons, Standing Committee on National Defense, April 19, 2016. 63 T he “Beyond the Border” declaration and action plan are available at https://www.dhs.gov/sites/default/files/ Congressional Research Service 13 Canada-U.S. Relations  a 2012 Visa and Immigration Information Sharing Agreement that al ows for the automated sharing of biographic and biometric information;  a 2013 entry/exit program that al ows data on entry to one country to serve as a record of exit from the other;  a 2015 Agreement on Land, Rail, Marine, and Air Transport Preclearance that al ows customs and immigration officials to clear travelers and cargo in their countries of origin; and  a 2016 accord that al ows for the exchange of information on individuals who information on individuals who present a clear threat, including the country'scountries’ respective "“no-fly" lists. It also led to other agreements, such as an entry/exit program that was launched in 2013 to allow data on entry to one country to serve as a record of exit from the other and a 2015 agreement to expand preclearance activities to all modes of transport. Implementation of those initiatives has been slow, however, due to Canadian concerns about privacy and sovereignty.

In December 2016, President Obama signed into law” lists.64 Canadian concerns about privacy and sovereignty delayed implementation of some of these initiatives.65 Consequently, the United States and Canada did not begin exchanging information on al U.S. and Canadian citizens under the entry/exit program until July 2019 and the Agreement on Land, Rail, Marine, and Air Transport Preclearance did not enter into force until August 2019. In 2016, Congress enacted the Northern Border Security Review Act (P.L. 114-267), which directed the U.S. Department of Homeland Security (DHS) to conduct an analysis of threats along the U.S.-CanadianCanada border. The public summary of the threat analysis, released in July 2017, asserted that "“the large volume of legitimate travel across the northern border and the long stretches of difficult terrain between ports of entry provide potential opportunities for individuals who may pose a national security risk to enter the United States undetected."⁴⁴”66 The analysis also noted, however, that encounters with individuals associated with transnational crime or terrorism arewere infrequent, and total apprehensions of individuals entering the United States from Canada between points of entry havehad remained below 800 per year for the past five years. Most of those apprehended have been Canadian citizens. DHS asserts that as a result of actions undertaken as part of the Beyond the Border initiative, Canada has been an effective partner in keeping foreign terrorist suspects from entering North America.⁴⁵ previous five years. DHS developed a new Northern Border Strategy, released in June 2018, which is in 2018 intended to address the security challenges chal enges identified in the threat analysis while facilitating lawful trade and travel.⁴⁶

While67 Although the number of individuals crossing il egal y into the United States from Canada between ports of entry has remained relatively low remained relatively low during the Trump Administration, the number of individuals crossing from the United States into Canada has grown significantly over the past two years. Nearly 21,000 individuals claimed asylum in Canada after being intercepted between points of entry in 2017.⁴⁷ The pace of irregular crossings has accelerated this year, with nearly 8,000 individuals encountered from January to April 2018.⁴⁸ The influx of asylum-seekers reportedly has overwhelmed Canada's refugee processing system, leading the Canadian government to set aside C$173 million (about $134 million) in its latest budget to patrol border crossings and process asylum applications.⁴⁹ The influx also has strained the resources of aid agencies and local and provincial governments, which are struggling to house and provide social services for the new arrivals.⁵⁰

This northern flow of asylum-seekers appears to have been spurred, in part, by the Trump Administration's immigration policies, Canada's image as a sanctuary for refugees, and misperceptions about Canada's immigration system. An initial surge occurred after President Trump signed several executive orders related to immigration enforcement in January 2017, and another surge occurred after the Trump Administration indicated in May 2017 that up to 59,000 Haitians with Temporary Protected Status (TPS) would likely lose their protection from removal.⁵¹ Although most asylum-seekers who enter Canada through an official border crossing may be returned immediately to the United States under a 2002 "Safe Third Country Agreement," which requires claimants to seekbetween official ports of entry grew significantly. More than 56,500 individuals requested asylum in Canada after crossing the border irregularly from 2017 to 2019, more than double the number who did so from 2014 to 2016.68 This northern flow of asylum-seekers appears to have been spurred, in part, by the Trump Administration’s immigration policies, such as the termination of Temporary Protected Status for more than 55,000 Haitians,69 as wel as by Canada’s image as a sanctuary for refugees after the Trudeau government resettled more than 25,000 Syrians in its first 100 days in office. At times, the influx of asylum-seekers publications/us-canada-btb-action-plan.pdf. 64 DHS, “Beyond the Border Fact Sheet,” January 2017. 65 Evan Dyer, “Ottawa Gets an Earful on Proposed Expansion of U.S. Border Pre-clearance Powers,” CBC News, August 6, 2017; and John Paul T asker, “Ottawa’s Push to Share More Border-Crossing Data with U.S. Raising Red Flags over Privacy,” CBC News, June 28, 2018. 66 DHS, Northern Border Threat Analysis Report: Public Summary, July 2017, at https://www.dhs.gov/sites/default/files/publications/17_0731_Public_Summary_NBSRA_0.pdf. 67 DHS, Northern Border Strategy, June 12, 2018, at https://www.dhs.gov/sites/default/files/publications/18_0612_PLCY_DHS-Northern-Border-Strategy.pdf. 68 Immigration Review Board of Canada, “Irregular Border Crosser Statistics,” September 9, 2020; and Immigration, Refugees, and Citizenship Canada, “Asylum Claims By Year – 2011-2016,” January 14, 2021. 69 For more on T emporary Protected Status, see CRS Report RS20844, Temporary Protected Status: Overview and Current Issues, by Jill H. Wilson. Congressional Research Service 14 Canada-U.S. Relations overwhelmed Canada’s refugee processing system and strained the resources of aid agencies and local and provincial governments.70 Under a 2002 Safe Third-Country Agreement, which requires individuals to claim protection in protection in the first safe country in which they arrive, thoseCanada may immediately return to the United States most asylum-seekers who enter through an official border crossing. Those who enter between ports of entry generally, however, general y may remain in Canada while their claims are processed.⁵² The Canadian government reportedly would like71 In response to the recent influx, the Canadian government has sought to expand the Safe Third Country Agreement to cover the entire border.⁵³ It is facing pressure from Canadian refugee advocates, however, who have called for the agreement to be suspended to allow Canadian refugee advocates reject that approach and argue the agreement should be suspended to al ow asylum-seekers to enter Canada in a safer and , more orderly fashion.⁵⁴

Cybersecurity⁵⁵

72 In July 2020, the Federal Court of Canada ruled that Canada’s laws and regulations implementing the Safe Third Country Agreement violate the country’s Charter of Rights and Freedoms based on evidence the United States detains asylum-seekers returned from Canada as a penalty for making protection claims.73 Nevertheless, the agreement is to remain in place pending the results of the Trudeau government’s appeal. The U.S.-Canada border has been closed to al nonessential travel since March 2020, due to the COVID-19 pandemic. In addition to prohibiting cross-border travel for recreation or tourism, the United States and Canada have agreed to turn back al asylum-seekers—effectively applying the Safe Third Country Agreement along the length of the border for the duration of the health crisis. Some Members of Congress have cal ed for the U.S. and Canadian governments to loosen travel restrictions, which have disproportionately impacted residents of border communities. The Trudeau government has made some changes to al ow international students and individuals reuniting with family to cross the border but has stated that most restrictions wil remain in place until health conditions improve substantial y.74 Cybersecurity Both the United States and Canada rely on information technology as a strategic national asset that reaps many economic and societal benefits. However,This increasing reliance on internet-based systems has created new sets of vulnerabilities. Attacks on critical infrastructure, online influence campaigns, and the theft of digitallydigital y stored information, either for military or economic competitive advantage, are growing areas of concern for both countries. The Canadian government detected, on average, more than 2,500 state-sponsored cyber activities against its networks from 2013 to 2015.⁵⁶ In 2014, for example, the Canadian government accused China of carrying out a cyberattack on the National Research Council, Canada’s largest federal research and development organization. It reportedly took more than 16 months and C$100 mil ion (approximately $77 mil ion) for the Canadian government to mitigate the damage and rebuild the council’s networks.75 In the past two years, Russia-associated actors reportedly have probed the networks of U.S. and Canadian electric utilities and carried out 70 Craig Damian Smith, “ Changing U.S. Policy and Safe T hird-Country “Loophole” Drive Irregular Migration to Canada,” Migration Policy Institute, October 16, 2019; and Office of the Parliamentary Budget Officer, Costing Irregular Migration Across Canada’s Southern Border, November 29, 2018. 71 Immigration, Refugees, and Citizenship Canada, “Claiming Asylum in Canada—What Happens?,” March 3, 2017; Sela Cowger, “ Uptick in Northern Border Crossings Places Canada-U.S. Safe T hird Country Agreement Under Pressure,” Migration Policy Institute, April 26, 2017. 72 Brennan MacDonald and Vassy Kapelos, “Hussen Floats Possible Solution to Safe T hird Country Agreement Loophole,” CBC News, May 31, 2018. 73 Canadian Council for Refugees v. Canada (Immigration, Refugees, and Citizenship), FC 770 (2020), at https://decisions.fct -cf.gc.ca/fc-cf/decisions/en/item/482757/index.do. 74 “Canada to Keep U.S. Border Curbs Until Pandemic Is Much Less Serious,” Reuters, October 2, 2020. 75 Alex Boutilier, “National Research Council Bought $8m in New Laptops After Hack,” Toronto Star, April 10, 2017. Congressional Research Service 15 Canada-U.S. Relations malicious cyber activities against U.S. and Canadian research entities involved in the development of a COVID-19 vaccine.76 Recognizing the scope of the threat, the Trudeau government’s 2018 and 2019 budgets included nearly C$1 bil ion (approximately $769 mil ion) over five years to implement a new National Cyber Security Strategy.77 Those funds al owed Canada to consolidate operational cyber expertise from across the federal government in a new Canadian Center for Cyber Security, housed within the country’s signals intel igence agency, the Communications Security Establishment (CSE). The funds also supported the establishment of a new National Cybercrime Coordination Unit within the Royal Canadian Mounted Police to serve as a hub for cybercrime investigations. Although the new cybersecurity strategy focuses largely on protecting Canadians and critical government and private sector systems, the Trudeau government’s defense policy argues that “a purely defensive cyber posture is no longer sufficient.”78 The Canadian Armed Forces intend to develop “active cyber capabilities” to be employed against potential adversaries in support of government-authorized military missions.79 The CSE also may conduct “active” cyber operations; provisions enacted as part of a 2019 overhaul of Canada’s foreign intel igence and cybersecurity laws (Bil C-59) authorize the CSE “to degrade, disrupt, respond to or interfere with the capabilities, intentions or activities of a foreign individual, state, organization or terrorist group as they relate to international affairs, defence or security.”80 Some analysts argue that Canada’s shift toward offensive cyber operations carries new risks and that Canada needs to clarify how it intends to use the new capabilities.81 U.S.-Canada cooperation on cybersecurity is long-standing, both bilateral y and as members of the Five Eyes al iance. In 2012, DHS and Public Safety Canada approved a Cybersecurity Action Plan focused on strengthening cyber infrastructure on both sides of the border. The plan outlined a series of joint commitments intended to enhance collaboration on cyber incident management, increase engagement and information sharing with the private sector, and coordinate public awareness efforts.82 Both countries also committed to strengthening their cybersecurity capabilities and collaboration in the digital trade chapter of USMCA. Other bilateral efforts are focused on preventing, responding to, and recovering from critical infrastructure disruptions, including those caused by cyberattacks.83 Although Canada has yet to adopt a comprehensive approach toward the international aspects of cybersecurity, its positions typical y have aligned with those of the United States. In September 2019, for example, Canada joined the United States 76 Communications Security Establishment, Canadian Centre for Cyber Security, National Cyber Threat Assessment 2020, November 2020. 77 Public Safety Canada, National Cyber Security Action Plan: 2019-2024, 2019, p.1. The National Cyber Security Strategy is available at https://www.publicsafety.gc.ca/cnt/rsrcs/pblctns/ntnl-cbr-scrt-strtg/ntnl-cbr-scrt-strtg-en.pdf. 78 Department of National Defence, Strong, Secure, Engaged: Canada’s Defence Policy, June 2017, p. 72. 79 Department of National Defence, Strong, Secure, Engaged: Canada’s Defence Policy, June 2017, p. 73. 80 Bill C-59, Part 3, Section 19, at https://www.parl.ca/DocumentViewer/en/42-1/bill/C-59/royal-assent. 81 Ken Barker, Cyberattack: What Goes Around, Comes Around, Canadian Global Affairs Institute and University of Calgary, School of Public Policy, June 2019; and Josh Gold, Christopher Parsons, and Irene Poetranto, “Canada’s Scattered and Uncoordinated Cyber Foreign Policy: A Call for Clarity,” Just Security, August 4, 2020. 82 DHS and Public Safety Canada, Cyber Security Action Plan, 2012, at https://www.publicsafety.gc.ca/cnt/rsrcs/pblctns/cybrscrt -ctn-plan/cybrscrt -ctn-plan-eng.pdf. 83 DHS and Public Safety Canada, Canada-United States Action Plan for Critical Infrastructure, 2010, at https://www.dhs.gov/xlibrary/assets/ip_canada_us_action_plan.pdf; and Governments of the United States and Canada, Joint United States-Canada Electric Grid Security and Resilience Strategy, December 2016, at https://obamawhitehouse.archives.gov/sites/whitehouse.gov/files/images/Joint_US_Canada_Grid_Strategy_06Dec2016.pdf. Congressional Research Service 16 link to page 21 link to page 22 Canada-U.S. Relations and 26 other countries in affirming the applicability of international law in cyberspace and pledging to hold states accountable for “bad behavior,” such as targeting critical infrastructure, undermining democracies, and undercutting fair economic competition.84 Economic and Trade Policy As an open economy dependent on world trade, Canada is significantly affected by the global economy and by its largest trading partner, the United States. (See Table 1 for comparative economic statistics). Like other economies around the world, Canada has experienced a steep contraction due to the COVID-19 pandemic. Although Canada recorded an anemic 1.7% growth rate in 2019, its average growth in the 10 years since the end of the 2008-2009 global financial crisis was a modest 2.2%. Canada’s GDP declined by 0.9% in the first quarter of 2020, 13.0% in the second quarter, and a further 5.2% in the third quarter (see Figure 3). Forecasters predict a yearly 2020 average decline of 5.7% (IHS Markit Intel igence [IHS]) to 5.8% (Economist Intel igence Unit [EIU]), but they expect a rebound of 4.0% (EIU) to 4.6% (IHS) in 2021. Canadian unemployment rose from a generational low of 5.6% in 2019 to 13.7% in May 2020. It has fal en gradual y since, and both forecasters expect a 2020 yearly average of 9.5%.85 Table 1. United States and Canada: Selected Comparative Economic Statistics, 2019 (estimated 2020 figures in parentheses) Indicator United States Canada GDP Nominal PPP (bil ion U.S.$) 21,433 (20,559) 1,929 (1,825) Per Capita GDP Nominal PPP (U.S.$) 65,133 (63,600) 51,586 (49,850) Real GDP Growth 2.2% (-4.6%) 1.7% (-5.8%) Recorded Unemployment Rate 3.7% (8.4%) 5.7% (9.5%) Exports G&S (% GDP) 11.7% (10.3%) 31.9% (29.9%) Imports G&S (% GDP) 14.6% (12.7%) 33.5% (31.1%) Sectoral Components of GDP (%) Industry 18.2% (17.2%) 27.1% (26.8%) Services 81.0% (81.9%) 70.0% (70.9%) Agriculture 0.8% (0.9%) 2.9% (2.4%) Budget Balance (% GDP) -4.6% (-14.9%) -0.4% (-13.5%) Public Debt/GDP 79.2% (98.0%) 31.1% (49.1%) Average MFN Tariff 3.3% 3.9% Sources: Economist Intel igence Unit (EIU); U.S. Census Bureau; Bureau of Economic Analysis; Statistics Canada; World Bank; World Trade Organization (WTO) Tariff Profiles. 2020 estimates from the EIU. Notes: GDP = gross domestic product; G&S = goods and services; MFN = most-favored-nation (WTO) tariff; PPP = purchasing power parity. 84 U.S. Department of State, “Joint Statement on Advancing Responsible State Behavior in Cyberspace,” September 23, 2019. 85 Statistics from Economist Intelligence Unit (EIU) and IHS Markit Intelligence data sets. Congressional Research Service 17 link to page 8 link to page 8 link to page 23 Canada-U.S. Relations Figure 3. Recorded and Projected Real GDP, United States and Canada: 2017-2022 Source: CRS presentation of data from the Economist Intel igence Unit, Country Data Tool, January 2021. Note: Data for 2017 Q1-2020 Q3 are final, data for 2020 Q4 are estimates, and data for 2021-2022 are projections. Budget Policy The Canadian government’s response to the COVID-19 crisis, discussed above (see “Minority Government and Pandemic Response”), has swollen the current budget deficit and forecasts for future deficits (see Figure 4). On November 30, 2020, Department of Finance Canada released its Fall Economic Statement 2020, which forecast the deficit to hit C$381.6 bil ion (approximately $294 bil ion) in the 2020-2021 fiscal year, a tenfold increase from 2019 and amounting to nearly a fifth of Canada’s forecast GDP for 2020.86 According to Deputy Prime Minister and Minister of Finance Chrystia Freeland, as of November 30, 2020, the Canadian government had spent C$322 bil ion (approximately $248 bil ion) on direct measures to fight COVID-19 and provide support to individuals, along with C$85 bil ion (approximately $65 bil ion) in tax and duty deferrals.87 The expanding budget deficit does not appear to have constrained the government’s recovery plans. In the Fall Economic Statement 2020, the government announced a COVID-19 recovery stimulus plan costing C$70-C$100 bil ion (approximately $54-$77 bil ion) to “build Canada out of this recession towards an economy that is cleaner, more inclusive, more innovative, and more competitive.”88 The government maintains that “fiscal guardrails”—described as the 86 Department of Finance Canada, Supporting Canadians and Fighting COVID-19: Fall Economic Statement 2020, November 30, 2020, p. 104. 87 Chrystia Freeland, “Supporting Canadians and Fighting COVID-19,” November 30, 2020. 88 Chrystia Freeland, “Supporting Canadians and Fighting COVID-19,” November 30, 2020. Congressional Research Service 18 Canada-U.S. Relations unemployment rate and other labor-related metrics—wil determine the length of the stimulus.89 The next budget, due in March 2021, likely wil detail the various programs and expenditures. Figure 4. Recorded and Projected Budget Deficits, United States and Canada: 2017-2025 Source: CRS presentation of data from the Economist Intel igence Unit, Country Data Tool, January 2021. Note: Data for 2017-2019 are final, data for 2020 are estimates, and data for 2021-2025 are projections. Government debt has been a sensitive political issue in Canada for generations (see text box, below). The Canadian government maintains that historical y low borrowing costs and the lowest federal government debt-to-GDP ratio among the Group of Seven (G-7) facilitate its fiscal plans.90 Others take a different view; Fitch, the credit rating agency, downgraded Canada’s sovereign debt from AAA to AA+ in June 2020.91 It noted that Canada’s general government debt (federal and provincial) is expected to rise to 115.1% of GDP in 2020 from 88.3% of GDP in 2019. International Monetary Fund projections indicate Canada suffered the worst deterioration in government finances among advanced countries, with the deficit representing 19.6% of the economy in 2020.92 Some commentators fear the additional debt burden wil have a negative impact on the eventual economic recovery when added to existing structural impediments, such as low productivity in the economy and continued weakness in the oil and gas sector.93 89 Department of Finance Canada, Supporting Canadians and Fighting COVID-19: Fall Economic Statement 2020, November 30, 2020, p. 72. 90 T he G-7 includes Canada, France, Germany, Italy, Japan, the United States, and the United Kingdom. 91 Fitch Ratings, “Fitch Downgrades Canada’s Ratings to ‘AA+’; Outlook Stable,” June 24, 2020. 92 International Monetary Fund, “T able 1.1 General Government Fiscal Balance, 2012–25: Overall Balance,” in Fiscal Monitor, October 2020. 93 Don Drummond, “Canada’s Foggy Economic and Fiscal Future,” C. D. Howe E-Brief, October 20, 2020. Congressional Research Service 19 link to page 25 Canada-U.S. Relations Debt and Deficits: The Canadian Experience In 1993, after 27 straight years of deficit spending by both Liberal and Conservative governments prior to an “austerity” budget in 1995, Canada’s public debt reached a peak of 101.6% of gross domestic product (GDP) and government sector spending reached 53.6% of GDP. Realizing this course was unsustainable, the Liberal government of Prime Minister Jean Chrétien and his finance minister, Paul Martin, embarked on a financial austerity plan in 1995, using such political y risky measures as cutting federal funding for health and education transfers, applying a means test to those eligible for Seniors Benefits, and cutting defense spending. Modest tax increases also were 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. However, in the face of the global financial crisis in 2009, the Conservative government of Prime Minister Stephen Harper introduced a budget package of stimulus spending and tax cuts, producing a fiscal deficit for the first time in a decade. From 2009 to 2015, the Conservative government ran deficits; the deficit reached 5% of GDP in 2010 but, through austerity and improved economic conditions, was steadily whittled down to 1.9% of GDP by 2015. The Harper government sought to return Canada to fiscal balance by the 2015 election, resorting to certain one-off savings, such as sel ing embassies and liquidating (literal y) gold coins found in the Bank of Canada vaults. Ultimately, a sluggish economy thwarted those plans and the last Harper budget in 2015 left a C$3 bil ion (approximately $2.3 bil ion) deficit. During the 2015 election, Justin Trudeau upended Canadian political orthodoxy by campaigning on a targeted budget deficit—C$10 bil ion (about $7.7 bil ion) per year for three years—for infrastructure projects to stimulate a sluggish economy reeling from the commodity and energy price col apse at mid-decade. This electoral gambit paid off at the pol s, and the Trudeau government has consistently resorted to deficits to fund its programs. Sources: Bil Curry, “Government Defends Foreign Property ‘Fire Sale,’” Globe and Mail, December 4, 2014; Bil Curry, “Bank of Canada’s Gold Coins to be Liquidated in Federal Push to Balance Books,” Globe and Mail, December 30, 2013; and Les Whittington and Tonda MacCharles, “No Surplus After Al , Due to Sputtering Economy and Harper Spending, Liberals Say,” Toronto Star, November 20, 2015. Monetary Policy Since the 2008-2009 global financial crisis, the United States and Canada have maintained accommodative monetary policies. The Bank of Canada (BOC) kept its interest rate at 1% from September 2010 until 2015; the BOC lowered its rate twice that year, in January and July, ultimately to 0.5%. Subsequently, the BOC gradual y raised its benchmark rate to a high of 1.75% in October 2018. In response to the COVID-19 crisis, the BOC lowered its key rate three times in March 2020 to 0.25%, where it has remained since (see Figure 5). In addition, the BOC is engaged in quantitative easing by buying up to $4 bil ion in Canadian government bonds per week. The key rate is not expected to rise until at least 2022.94 94 Don Pittis, “Little Fear of Rate Hike Despite Expected Economic Surge: Bank of Canada,” CBC News, January 21, 2021. Congressional Research Service 20 link to page 26 Canada-U.S. Relations Figure 5. Recorded and Projected Policy Interest Rates, United States and Canada: 2004-2025 Source: CRS presentation of data from IHS Markit Intel igence, January 2021. Note: Data for 2017-2020 are final; data for 2021-2025 are projections. The value of the Canadian dollar (or loonieCouncil, which is charged with supporting industrial innovation, advancing technological development, and fulfilling Canadian government mandates. The cost of mitigating the damage reportedly exceeded C$100 million.⁵⁷ More broadly, the Canadian government blocks 600 million attempts each day to identify or exploit vulnerabilities in its systems and networks.⁵⁸

Economic and Trade Policy

Figure 2. United States and Canada Real Gross Domestic Product (GDP): 2008-2017 real percentage change quarterly

Source: Economist Intelligence Unit, Country Data Tool.

Budget Policy

Figure 3. Projected Budget Deficits: United States and Canada: 2017-2022 budget deficits as a percentage of GDP

Source: Economist Intelligence Unit.

Monetary Policy

The value of the Canadian dollar (or loonie, its nickname) has varied in terms of the U.S. dollar in recent years (see Figure 4). Prior to the financial crisis, the Canadian dollar had been, often as a result of the demand for commodities (see Figure 6). Prior to the global financial crisis of 2008-2009, the Canadian dollar was nearly at parity, trading at slightly less than the U.S. dollar. During the financial crisis it, the Canadian dollar dropped to a monthly average of C$1.26/USU.S.$1. As the economy stabilized and demand for commodities and energy resumed, the Canadian dollar appreciated to C$0.96/USagain to parity, reaching C$0.96/U.S.$1 in July 2011. As oil prices dropped and the commodity boom ended, the Canadian dollar began depreciating,to depreciate; its decline acceleratingaccelerated with the BOC’s reduction of interest rates from 1.0% to 0.5% in 2015. The Canadian dollar hit a low of C$1.42/USU.S.$1 in January 2016. The currency has since rebounded with higher interest rates and has remained in the C$1.30-1.20/$1.00 range in the 2017-2018 period.

but has not appreciated above C$1.20/U.S.$1. The strength of the Canadian dollar roughly fromfrom roughly 2002 to 2008 and roughly 2010 to 2013 had a detrimental effect on Canadian manufacturing, as export-dependent goods became relatively uncompetitive in world markets. The Canadian auto industry was especiallyespecial y hard hit, as the center of gravity of U.S. production has moved south, and new North American investment has bypassed Canada for the United States and, especiallyespecial y, Mexico.⁷¹95 Since the end of the commodities boom, the loonie has depreciated from its generational highs and manufacturing has picked up, but, like as with the United States, itmanufacturing represents a declining share of GDP. 95 “T he New Rustbelt,” Economist, August 29, 2015; “Auto Manufacturing in Canada in Long-T erm Decline, Report Warns,” Toronto Star, April 19, 2013. Congressional Research Service 21 Canada-U.S. Relations Figure 6. Exchange Rates: 2005-2020 Source: CRS presentation of data from the Economist Intel igence Unit, Country Data Tool, January 2021. Investment The U.S.-Canada economic relationship is characterized by substantial ownership interests in each nation by investors of the other. The United States is the largest single investor in Canada, with a stock of $402.3 bil ion in 2019, a figure representing 6.8% of total U.S. foreign direct investment (FDI) abroad. U.S. investors accounted for 46.7% of FDI in Canada in 2019, with manufacturing, finance/insurance, and mining/energy comprising the three largest categories of U.S. FDI. Canada had the third-largest FDI position in the United States in 2019 at $495.7 bil ion, 11.1% of the total FDI stock in the United States in that year, trailing only the United Kingdom and Japan. The United States is the most prominent destination for Canadian FDI, with a stock of 45.4% of total Canadian FDI abroad in 2019.96 Foreign investment has played a large part in the development of the Canadian economy. British and American capital was instrumental in building Canada’s railways in the 19th century and in exploiting its resources in the 20th century. Although Canada general y is open to foreign investment, certain restrictions exist. Investment is monitored, and some types of FDI are reviewed; for example, “significant investments in Canada by non-Canadians” are reviewed under the Investment Canada Act to ensure “net benefit” to Canada. Al transactions involving uranium production, financial services, transportation services, or cultural industries must be reviewed.97 Net benefit is assessed on such factors as 96 U.S. Bureau of Economic Analysis (BEA), Survey of Current Business, July 2020; Statistics Canada, “Foreign Direct Investment, 2019,” July 17, 2020. 97 Cultural business refers to the publication of books, magazines, periodicals or newspapers; production, distribution, or sale or exhibition of film, video recordings, audio or video musical recordings; publication or dissemination of print music; or radio, television, cable, or satellite broadcasting. Congressional Research Service 22 Canada-U.S. Relations  effect on the level of economic activity in Canada, including employment;  degree or significance of participation by Canadians;  effect on productivity and technological development;  effect on competition;  effect on Canadian competitiveness in world markets; and  compatibility with national, industrial, or cultural policies. Acquisitions by foreign state-owned enterprises are subject to additional scrutiny to assess whether they meet the net-benefit test. The additional criteria include whether the state-owned enterprise adheres to Canadian standards of corporate governance and whether the Canadian business acquired wil continue to have the ability to operate on a commercial basis. A transaction also may be reviewed if it raises national security concerns. The 2021 net benefit review threshold for parties to the WTO is C$1.043 bil ion (approximately $802 mil ion). The threshold for FTA partners, including the United States, is C$1.565 bil ion (approximately $1.2 bil ion), and the threshold for state-owned enterprises is C$415 mil ion (approximately $319 mil ion).98 represents a declining share of GDP.

Figure 4. Exchange Rates: 2009-2018, Quarter 1 Canadian dollars per U.S. dollar

Source: Economist Intelligence Unit, Country Data Tool. Note: Years are shown followed by numerical months (e.g., January 2008 is shown as 200801).

U.S.-Canada Trade Relations

U.S.-Canada Trade Relations The United States and Canada enjoy one of the largest bilateral commercial relationships in the world. Over the past 30 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, then by NAFTA, and since July 1, 2020, by USMCA. The two countries were leaders in the creation of the open, rules-based multilateral trading system characterized by mutual concessions on market access for goods and services, disciplines on trade restrictionsrestrictions, and binding dispute -settlement mechanisms. Both countries were founding members of the General Agreement on Tariffs and Trade, the genesis of the postwar multilateral trading system, and in 1994 werewere among the founding members of the World Trade Organization. Now, however, the unilateral tariff measures imposed by the Trump Administration, its WTO. However, some have cal ed this trading system into question due to developments under the Trump Administration, including the Administration’s imposition of unilateral tariff measures, withdrawal from the Trans-Pacific Partnership (TPP) regional trade agreement, and its skepticism of multilateralism have called this system into question. Regionally, the Trump Administration has engaged Canada and Mexico to negotiate revisions to the nearly 25-year-old North American Free Trade Agreement (NAFTA).

skepticism of multilateralism. President Biden has pledged to reinvigorate bilateral cooperation and strengthen economic ties, as wel as multilateral institutions.99 Nonetheless, his early decision to cancel the Keystone XL pipeline project and his commitment to Buy American policies have caused concern in Canada. 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 one of the largest trading relationships in the world, with $1.6 billion per day in goods crossing the border in 2017. However, in 2015, China overtook Canada as the largest trading partner of the United States. Canada is the largest country destination for U.S. exports, although China replaced Canada as the largest supplier of imports to the United States in 2007 and Mexico surpassed Canada in 2015.

In 2017, Canada was the largest purchaser of U.S. goods at 18.3% of U.S. goods exports. Canada 4 bil ion of goods crossing the border daily in 2020. Canada remained the largest purchaser of U.S. goods in 2020, accounting for 12.0% of total U.S. merchandise exports. Canada also was the third-largest supplier of U.S. imports at 12.8% of all U.S. goodsin 2020, accounting for 11.6% of total U.S. merchandise imports. The United States is Canada'’s largest goods export destination and import supplier. In 20172020, the United States supplied 53.3% of Canada's imports of goods and purchased 75.9% of Canada's merchandise exports. Two-way trade with the United States represented nearly 32% of Canadian GDP that year.

Figure 5. U.S. Trade Balance with Canada: 2008-2017 $ in billions

Source: CRS, compiled from U.S. International Trade Commission and Bureau of Economic Analysis Data. Notes: Dom gds bal = imports for consumption/domestic exports; ttl gds bal = General imports/total export; serv bal = services balance; dom g&s bal = (imports for consumption/domestic exports) + services; ttl g&s bal = (total exports/general imports) + services.

NAFTA Renegotiation

On May 18,48.9% of Canadian goods imports and was the destination of 73.8% of Canadian goods exports. Total two-way trade (goods and services) between Canada and the United States represented nearly 37.6% 98 Innovation, Science, and Economic Development Canada, “Investment Canada Act,” at https://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/home. 99 White House, “Readout of President Joe Biden Call with Prime Minister Justin T rudeau of Canada,” January 22, 2021. Congressional Research Service 23 link to page 28 Canada-U.S. Relations of Canadian GDP in 2019 (2020 services trade data are not yet available). The United States ran a goods trade deficit of nearly $15 bil ion with Canada in 2020. In 2019, the U.S. goods deficit was $26.8 bil ion but was offset by a $29.1 bil ion services trade surplus for an overal surplus of $2.3 bil ion.100 Table 2 describes the composition of imports and exports between the United States and Canada. Table 2. Composition of Trade with Canada 2020: Top 15 Commodities (bil ions of U.S.$) U.S. Exports to Canada U.S. Imports from Canada Vehicle parts and 11.08 Crude petroleum 42.70 accessories Passenger vehicles 10.63 Passenger vehicles 29.43 Motor vehicles for goods 10.14 Articles returned or 14.69 repaired Low-value export 10.07 Vehicle parts and 7.72 shipments accessories Refined petroleum 6.86 Refined Petroleum 6.73 Crude petroleum 6.53 Lumber 6.17 Civilian aircraft, engines 6.39 Petroleum gases 5.70 and parts Data processing machines 6.28 Unwrought aluminum 4.49 Line telephony and 3.35 Medicaments 4.21 equipment Internal combustion 3.02 Aircraft 4.02 engines Waste and scrap of 2.70 Gold 3.42 precious metal Medicaments 2.66 Polymers of ethylene (raw 3.01 plastic) Centrifuges and parts 2.18 Baked goods and baked 2.98 therof commodities Taps, cocks, and valves, 2.14 Aircraft engines and parts 2.89 and parts thereof Medical instruments 2.05 Salvage 2.45 Al others 169.07 Al others 129.73 Total 255.15 Total 270.38 Source: CRS, from U.S. International Trade Commission data. Notes: Harmonized Tariff Schedule (HTS-4) entries, general imports, total exports. Trade between the United States and Canada dropped substantial y in 2020 from pre-COVID-19 levels. Overal , total trade in 2020 dropped 14.1% from 2019. Exports to Canada fel 12.8%, and imports from Canada dropped 15.3%. Trade in individual commodities reflected these drops. However, U.S. exports of low-value shipments, which includes shop-at-home, mail-order, and goods purchased through e-commerce, increased 36.1% in 2020, likely due to COVID-19 100 T rade figures are from U.S. International T rade Commission and Bureau of Economic Analysis. Congressional Research Service 24 Canada-U.S. Relations restrictions. Conversely, imports of softwood lumber increased by 41.2% due to the ongoing housing boom in the United States. The United States also conducts substantial services trade with Canada. In 2019, Canada was both the second-largest consumer of U.S. services and the second-largest supplier of services to the United States. That year, the United States exported $67.7 bil ion worth of services to Canada and imported $38.6 bil ion, for a surplus of $29.1 bil ion. Services exports to Canada accounted for 7.7% of U.S. service exports overal ; imports represented about 6.6% of total U.S. service imports. Leading services exports to Canada included travel, professional and management services, intel ectual property (computer software, audio visual), and education services.101 In 2019, U.S. service exports represented 54.2% of Canadian service imports and Canadian service exports to the United States represented 56.3% of total Canadian service exports.102 U.S. travelers accounted for 33.1% of Canada’s travel and tourism receipts in 2019; Canadians spent 54.3% of their tourist dollars in the United States that year. United States-Mexico-Canada Agreement In May 2017, the Trump Administration sent notification to Congress of its intent to begin talks with Canada and Mexico to renegotiate NAFTA.⁷³ Following the 90-day consultation period with Congress mandated under trade promotion authorityTrade Promotion Authority (TPA), negotiations began on August 16, 2017. Initially, in August 2017. Initial y, much of the discussion revolved around revising and modernizing the nearly 25-year-old accord. All Al three parties alludedal uded to incorporating new or expanded language from the Trans-Pacific Partnership (TPP) TPP negotiations on e-commerce, intellectualintel ectual property rights (IPR), investment, labor, environment, sanitary and phytosanitary standards, state-owned enterprises, data flows, and data localization—requirements to maintain data in country. At times during the negotiations, President Trump threatened to withdraw from NAFTA. The overal gist of U.S. proposals appearedrequirements to maintain data in country. A goal to conclude the talks by March 31, 2018, was not met; nor has a goal to conclude the talks by the end of May 2018, potentially allowing for consideration in the current session of Congress, been met. The imposition of tariffs on steel and aluminum from Canada and Mexico (see "Steel and Aluminum Tariffs") may have further dampened momentum for an agreement.

At times, President Trump has threatened to withdraw from NAFTA. The Administration has also tabled some proposals that are considered unacceptable or unworkable by Canada and Mexico and have become sticking points in the negotiations. The overall gist of U.S. proposals appears to be aimed at reducing the bilateral trade deficits with Canada and Mexico and returning manufacturing jobs to the United States. To that end, the Administration tabled some proposals that Canada and Mexico considered unacceptable or unworkable and subsequently dropped those proposals in the negotiations. On most issues, the negotiating dynamic general yUnited States. If those goals are not achievable, they may be used as a pretense to withdraw from the talks. Economists, in general, contend that trade deficits and job creation are more a function of macroeconomic conditions and not of free trade agreements (FTAs). On most issues, the negotiating dynamic generally has pitted the United States against Canada and Mexico, which arewere more interested in modernizing the agreement and oppose opposed proposals that would restrict trade. Initial deadlines to conclude the talks were not met, but the United States and Mexico concluded an agreement on August 30, 2018, al owing the President to provide a 90-day notice to sign an agreement under TPA on November 30, 2018. The United States and Canada subsequently reached agreement in September 2018, and a draft text was released. On November 30, 2018, President Trump, President Enrique Peña Nieto of Mexico, and Prime Minister Trudeau signed USMCA. With the change in control in the House of Representatives in the 116th Congress, Members of the House Ways and Means Committee and the Trump Administration negotiated changes to several aspects of the agreement. On December 10, 2019, the United States, Canada, and Mexico agreed to a protocol of amendment to the original USMCA text. The revisions include modifications to key elements of the original text regarding dispute settlement, labor and environmental provisions, IPR protection, and steel and aluminum requirements in the motor vehicle industry’s 101 International T rade Administration, Canada – Country Commercial Guide, at https://www.trade.gov/knowledge-product/canada-market -overview. 102 BEA, Survey of Current Business, October 2020; Statistics Canada, “International T ransactions in Services, T able 36-10-0007-01,” January 25, 2021. Congressional Research Service 25 Canada-U.S. Relations rules of origin. The revised agreement provides for a facility-specific rapid response labor mechanism to address worker rights provisions. Implementing legislation was introduced in the House of Representatives (H.R. 5430, 116th Congress) and in the Senate (S. 3052, 116th Congress) in December 2019. The legislation was approved by the House in December 2019, by a vote of 385-41 and by the Senate in January 2020, by a vote of 89-10. President Trump signed the legislation (P.L. 116-113) on January 29, 2020. The agreement entered into force on July 1, 2020. USMCA maintains most of the existing, largely tariff-free trade created by NAFTA. It provides additional incremental market access in agriculture products with Canada, changes the automotive rules of origin, updates some provisions of NAFTA, and adds new chapters concerning digital trade and state-owned enterprises. The following are some key outcomes of relevance to Canada.103 The agreement  Tightens automotive rules of origin (ROO). To receive preferential treatment, autos and auto parts must contain 75% USMCA content, up from 62.5% for autos and 60% for auto parts in NAFTA. In addition, 70% of the steel and aluminum in autos and auto parts must be of USMCA origin and 40%-45% of auto content must be made by workers making at least $16 per hour. This last provision was supported by Canada, which has a similar wage structure to the United States, although the overal impact of the ROO changes is uncertain.  Provides limited tariff-rate quota increases for U.S. exports of dairy, poultry, and egg products to Canada. Canada also removed its “Class 7” pricing for ultra-high filtration milk.104 In return, the United States expanded access to Canadian dairy, sugar, peanuts, and cotton.105  Eliminates the investor-state dispute settlement (ISDS) mechanism between the United States and Canada to enforce al eged violations of investor protection in the investment chapter of the agreement. Canada supported this U.S. proposal. The agreement maintains a more limited U.S.-Mexico ISDS mechanism.  Retains the NAFTA binational review mechanism for antidumping and countervailing duty national administrative decisions. The United States sought the elimination of this review mechanism, whereas Canada supported its retention as a priority issue.  Restricts the government procurement chapter to procurement between the United States and Mexico. U.S.-Canada procurement continues to be governed by the existing WTO Government Procurement Agreement (GPA) to which both countries are party. However, the agreement does not specifical y reference the GPA.  Expands IPR provisions to include the following:  Extension of copyright term to 70 years after the death of an author or creator (Canada previously provided 50 years) 103 For more information on USMCA, see CRS Report R44981, The United States-Mexico-Canada Agreement (USMCA), by M. Angeles Villarreal and Ian F. Fergusson; and CRS In Focus IF10997, U.S.-Mexico-Canada (USMCA) Trade Agreem ent, by M. Angeles Villarreal and Ian F. Fergusson. 104 Class 7 is a Canadian milk price classification comprised of skim milk components, primarily milk protein concentrates and skim milk powder used to process dairy products. 105 For more information on USMCA dairy provisions, see CRS In Focus IF11149, Dairy Provisions in USMCA, by Joel L. Greene. Congressional Research Service 26 link to page 14 Canada-U.S. Relations  Expansion of patent and regulatory protections for pharmaceuticals (however, extension of exclusivity periods for biologic drugs was dropped from the original y negotiated agreement)  Prohibitions on circumvention of technological protection measures  Criminal and civil penalties protections for trade-secret theft, including by state-owned enterprises and cybertheft  Copyright safe-harbor provisions on internet service provider liability  Continued exclusion of Canadian cultural industries from national treatment and most-favored-nation treatment New provisions in USMCA include the following:  A digital trade chapter to al ow for cross-border data flows and to restrict data localization  Binding obligations on currency manipulation  A sunset clause requiring a joint review and agreement on renewal of USMCA after 6 years, or the agreement would expire in year 16  Enforceable disciplines on state-owned enterprises  Possibility for a party to withdraw from the agreement if another party enters into an FTA with a country it deems to be a nonmarket economy (e.g., China)106 Canada also was broadly supportive of the additional labor and environmental protections negotiated between the Trump Administration and Congress. Canada’s Netw ork of Free Trade Agreements In addition to USMCA, Canada has FTAs with several other countries. It signed the TPP FTA and, following the Trump Administration’s withdrawal from the accord, negotiated a successor agreement, known as the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), with 10 other TPP members. CPTPP, which came into effect on December 20, 2018, provides Canada preferential market access for agriculture and livestock to several luc rative Asian markets, including Japan. However, this advantage was somewhat diminished after Japan signed a bilateral trade agreement with the United States in October 2019 affording the United States similar access to Japan’s agricultural markets.107 Canada’s Comprehensive Economic and Trade Agreement (CETA) with the EU provisional y came into force on September 21, 2017. This agreement provides preferential market access for goods and certain services (including agriculture), among other provisions, such as provisions on geographical indications—geographical names that protect the quality and reputation of a distinctive product originating in a certain region. For instance, Canada agreed to recognize geographical indications on certain cheeses general y viewed as common food names in the United States, leading to concerns in the U.S. dairy industry about U.S. market access in Canada. In a change from most U.S. FTAs—and previous European FTAs—CETA established an 106 T his provision was widely seen as an attempt to preempt the negotiation of a free trade agreement between Canada and China. However, the deterioration of relations between Canada and China have made the possibility of such an agreement increasingly unlikely (see “ Relations with China”). 107 For more information, see CRS In Focus IF11120, U.S.-Japan Trade Agreement Negotiations, by Cathleen D. Cimino-Isaacs and Brock R. Williams. Congressional Research Service 27 Canada-U.S. Relations investment court system with an appel ate mechanism to resolve disputes arising from CETA’s investment chapter instead of relying on ISDS. USMCA’s digital trade chapter has more expansive commitments than CETA, such as prohibitions on data localization and restrictions on impediments to cross-border data flows. Those prohibitions, in turn, may affect Canada’s ability to maintain its adequacy determination in the EU’s General Data Protection Regulation.108 To replicate CETA with the UK following its departure from the EU, Canada and the UK negotiated a Trade Continuity Agreement (TCA). Signed on December 9, 2020, the TCA rolls over the provisions of CETA and may serve as a bridge for a comprehensive bilateral FTA, which the two sides hope to negotiate within three years.109 In addition, Canada has FTAs in force with South Korea and with several countries in Central and South America. Disputes U.S.-Canada trade relations took on a different tone during the Trump Administration than during previous U.S. Administrations. Whether it was the reemergence of old irritants, such as trade in softwood lumber and dairy restrictions; the emergence of new disputes, such as Section 232 tariffs on steel or aluminum; or the presence of contentious USMCA negotiations, the commercial relationship between the two nations faced new chal enges. Perhaps characteristic of his sentiments, President Trump commented on the various trade disputes in a June 2018 tweet, writing “Canada has treated our Agricultural business and Farmers very poorly for a very long period of time. Highly restrictive on Trade! They must open their markets and take down their trade barriers! They report a real high surplus on trade with us. Do Timber & Lumber in U.S.?” The Biden Administration may take a less confrontational approach to trade relations with Canada. However, some long-standing issues, such as softwood lumber, Canadian dairy access, and IPR protections, may see further activity in 2021 and remain of congressional interest. Softwood Lumber Trade in softwood lumber, now in its fifth iteration of litigation, traditional y has been one of the most controversial topics in the U.S.-Canada trading relationshipproposals that would restrict trade.

Softwood Lumber

Trade in softwood lumber traditionally has been one of the most controversial topics in the U.S.-Canada trading relationship, which is now in its fifth iteration of litigation. The dispute revolves around . The dispute revolves around different pricing policies and forest management structures in Canada and the United Statesthe two countries. In Canada, most forests are owned by the Canadian provinces as Crown lands, whereas; in the United States, most forests are privately held. The provinces allocateCanadian provinces al ocate timber to producers under long-term tenure agreements, and charge a "stumpage fee,," which U.S. producers maintain is not determined by market forces, but rather acts as a subsidy to promote the Canadian industry, sectoral employment, or regional development. Canada denies that its timber management practices constitute a subsidy, and maintains that it has a comparative advantage in timber and a more efficient industry.

Until than the United States. Until October 2015, trade in softwood lumber was governed by a seven-year agreement (SLA)—reached in 2006 and sincesubsequently extended for two years, to 2015—restricting Canadian exports to the United States. As part of a complicated formula, the United States allowedal owed unlimited imports of Canadian timber when market prices remained above a specified level; when prices fell below fel below 108 Max Jarvie, “Canada: Cross-Border T ransfers and Data Localisation After the USMCA,” Data Guidance, June 2020. For information, see also CRS In Focus IF10896, EU Data Protection Rules and U.S. Im plications, by Rachel F. Fefer and Kristin Archick. 109 Janyce McGregor, “ Canada-U.K. T rade Deal Signed—But Implementing Bill Unlikely to Meet Deadline,” CBC News, December 9, 2020. Congressional Research Service 28 Canada-U.S. Relations that level, Canada imposed export taxes and/or quotas. In addition, the United States returned to Canada a large majority of the duties it had collected from previous trade remedy cases.

The current dispute (Lumber V) started when the 2006 Softwood Lumber Agreement (SLA)agreement expired. After a year-long grace period, a coalition of U.S. lumber producers filed trade remedy petitions on November 25, 2016, which claimed that Canadian firms dump lumber in the U.S. market and that Canadian provincial forestry policies subsidize Canadian lumber production. These petitions subsequently were accepted by the two U.S. agencies that administer the trade remedy process: the International Trade Commission (ITC) and the Department of Commerce’s International Trade Administration (ITA).

On December 7, 2017, the ITC determined that imports of softwood lumber, which ITA had previously determined to be dumped and subsidized by ITA, caused material injury to U.S. producers. This means that ITA' This finding meant ITA’s final duties in the antidumping (AD) and countervailing duty (CVD) proceedings, announced on November 2, 2017, cancould be imposed on affected Canadian lumber. ITA found subsidization of the Canadian industry and determined a subsidy margin of 3.34%-18.19% on Canadian lumber, depending on the firm. ITA found dumping margins of 3.20% to -8.89%, also firm dependent. The AD and CVDantidumping and countervailing duties were imposed on January 3, 2018. Canada is challenging Canada chal enged these trade remedy decisions at the WTO and at NAFTA/USMCA antidumping and countervailing duty binational review panels. Canada chal enged the consistency of the antidumping and countervailing duties with applicable WTO agreements, and panels were established in April 2018.110 In the antidumping case, a WTO panel ruled in an April 2019 split decision that ITA calculated dumping margins in a manner inconsistent with the WTO Anti-Dumping Agreement but ruled that the methodology used by ITA was consistent with the WTO agreement.111 Canada appealed the ruling to the Appel ate Body in June 2019. Another panel issued a report in the countervailing duty case in August 2020.112 The panel decided the United States violated the WTO Agreement on Subsidies and Countervailing Measures by improperly rejecting Canadian use of benchmark prices for softwood lumber in various provinces. The United States appealed this decision in September 2020. Both appeals currently are in limbo in the void of the nonfunctioning appel ate body. Canada also is chal enging the duties under the USMCA Chapter 10 bilateral review mechanism. The purpose of this review is to determine whether the administrative review bodies (ITA and ITC) adhere to U.S. law and regulation in making those determinations. On December 14, 2020, Canada filed its first request for panel review under the USMCA mechanism to chal enge the countervailing duties on Canadian lumber.113 Canada also chal enged the duties under the previous NAFTA binational panel. Canada filed chal enges to the final affirmative countervailing duty determination in November 2017, and to the final affirmative antidumping determination in December 2017. In September 2019, the panel found the ITC erred in the methodology and data it 110 For background on trade remedies, see CRS In Focus IF10018, Trade Remedies: Antidumping and Countervailing Duties, by Vivian C. Jones and Christopher A. Casey. 111 World T rade Organization (WT O), “DS 534: United States—Antidumping Measures Applying Differential Pricing Methodology to Softwood Lumber from Canada,” at https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds534_e.htm. 112 WT O, “DS533: United States—Countervailing Measures on Softwood Lumber from Canada,” at https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds533_e.htm. 113 Statement of Mary Ng, International T rade Minister, December 14, 2020. Congressional Research Service 29 Canada-U.S. Relations used to determine the U.S. domestic industry was injured by Canadian imports and ordered the ITC to reevaluate its data.114 Dairy On December 9, 2020, the office of the U.S. Trade Representative (USTR) sought its first consultation under USMCA’s Chapter 31 state-state dispute mechanism on dairy access under the agreement. Although USMCA did not end Canada’s supply management system for dairy, poultry, and eggs (see text box, below), it provided limited tariff-rate quota (TRQ) increases for U.S. exports. In distributing the additional quotas, USTR al eged Canada retained a portion of the quota for domestic processors and further processors, which USTR maintained violates USMCA. According to USTR, “this restriction undermines the value of Canada’s TRQs for U.S. producers and exporters by limiting their access to in-quota quantities negotiated under the USMCA.”115 Under the dispute mechanism, parties initial y enter into consultations to resolve the dispute. If these consultations are not successful, a party may request the establishment of a panel no earlier than 75 days after the initial request for consultation. Supply Management for Dairy, Poultry, and Eggs Canada uses supply management to support its dairy, poultry, and egg sectors. Although the United States-Mexico-Canada Agreement (USMCA) provided greater access to these markets, it did not dismantle the system. Supply management’s 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 it succeeded in limiting imports of these products in negotiating the U.S.-Canada Free Trade Agreement; NAFTA; USMCA; its multilateral commitments in the Uruguay Round’s Agreement on Agriculture; and, for the most part, its bilateral free trade agreements. 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 control ed by a quota system. Imports of each commodity are limited by tariff-rate quotas. These quotas al ow a specified amount to enter annual y under Canada’s trade commitments at little or zero duty but apply a very high tariff (over 200% in many cases) 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 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 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 be sold only into permitted marketing channels. 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 provided income support. Others note 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. Conversely, consumers end up paying more for these products, and some Canadians near the border cross over to the United States for their milk and egg runs. 114 “NAFT A Panel: IT C Acted Improperly in U.S.-Canada Softwood Lumber Case,” Inside U.S. Trade, September 6, 2019. 115 UST R, “ United States T akes Action for American Dairy Farmers by Filing First -Ever USMCA Enforcement Action,” press release, December 9, 2020. Congressional Research Service 30 Canada-U.S. Relations Intellectual Property Rights Canada has been placed on USTR’s Special 301 “watch list,” or priority watch list, for IPR protections every year since 2013.116 In 2018, Canada enacted its Copyright Modernization Act, which implemented the World Intel ectual Property Organization Copyright Treaty and Performance and Phonograms Treaty.117 The act is analogous to the U.S. Digital Mil ennium Copyright Act (P.L. 105-304). The Canadian act al owed for some format shifting (right to copy/back up for private purposes) and fair-dealing (fair-use) exceptions for legitimate purposes (e.g., news, teaching, and research) but prohibited the circumvention of digital protection measures. It also clarified the rights and responsibilities of internet service providers regarding infringement of their subscribers and provided for a “notice-and-notice system” to warn potential infringers. In 2020, Canada remained on USTR’s watch list, its mildest category of rebuke.118 Many concerns in previous Special 301 reports were ameliorated by the implementation of USMCA. IPR provisions in USMCA affecting Canada include the following:  Lengthening copyright terms to 70 years from 50 years in force in Canada  Authority for ex officio seizure of counterfeit and pirated goods at the border or in transit; Canada has legislated the former, but not the latter  “Meaningful” penalties for technological circumvention measures  New transparency requirements for geographical indications  Patent term restoration and patent linkage provisions As a result of the CETA these trade remedy decisions at World Trade Organization and NAFTA Chapter 19 tribunals.

Steel and Aluminum Tariffs

Commercial Aircraft

Intellectual Property Rights (IPR)

As a result of the Comprehensive Economic and Trade Agreement (CETA), Canada's FTA with the European Union, Canada revamped its regulations on patent term restoration and patent linkage. Canada willis to provide two years of a patent term restoration if marketing authorization takes longer than five years from the filing of a basic patent. The additional patent protection applies only to the pharmaceutical product covered by the marketing authorization, not by subsequent modifications of uses, methods, or processes. In the 2018 Special 301 reportReport, USTR calledcal ed the changes "“disappointingly limited in duration, eligibility, and scope of protection."⁹⁴

”119 Canada also changed its patent linkage system to comply with CETA. Under, which was a long-standing goal of the United States. Under Canada’s previous system, the Patent Medicines (Notice of Compliance) [PMNOC] regulations, a generic drug maker could seek marketing approval by challengingchal enging the validity of the patent and claiming noninfringement. It allowedThe system al owed a patent owner to apply to federal court to keep a generic company's potentially’s potential y infringing medicine off the market. However, the burden of proof was on the patent holder, and if the appeal was unsuccessful, the NOCa notice of compliance was issued, rendering moot any further challengechal enge to the authorization. A patent holder could start again by launching a patent infringement lawsuit, with the resultant duplication of effort. As of September 21, 2017, Canada replaced that system with a single-track 116 In the 2018 Special 301 report, Canada was downgraded to “priority watch list” status due to what UST R contends is “a failure to resolve longstanding deficiencies in protection and enforcement of IP.” For more information on Special 301, see CRS Report RL34292, Intellectual Property Rights and International Trade, by Shayerah I. Akhtar, Ian F. Fergusson, and Liana Wong. 117 T he World Intellectual Property Organization Copyright Treaty updates existing copyright protections for internet and other electronic media. 118 UST R, 2020 Special 301 Report, April 2020, at https://ustr.gov/sites/default/files/2020_Special_301_Report.pdf. 119 UST R, 2018 Special 301 Report, April 2018, p. 60. Congressional Research Service 31 Canada-U.S. Relations process resulting in final determinations of patent infringement and validity, providing both sides with equivalent rights of appeal.120 The 2020 Special 301 Report drew attention to Canada’s Patent Medicine Prices Review Board (PMPRB), especial y to updates to the board’s guidelines scheduled to enter into force on July 1, 2021. The PMPRB is an independent quasi-judicial body established by Parliament under the Patent Act in 1987. Its stated mandate is “to protect and inform Canadians by ensuring that the prices of patented medicines sold in Canada are not excessive and by reporting on pharmaceutical trends.”121 The board does not set prices on its own, but it can refer what it considers excessive prices a patentee charges for strengths and forms of a patented medicine to an arbitral panel. Such a panel can order the price be reduced if it finds a particular patented medicine to be priced at an excessive level. The board’s determinations are used to provide stakeholders with price, cost, and utilization information to help them to make pricing, purchasing, and reimbursement decisions.122 The proposed changes to its guidelines include the following:  Pricing benchmarked against countries that PMPRB has deemed to be similar to Canada in terms of economic development and from the standpoint of consumer price protection.  Maximum price consideration to factor the overal value of a medicine using factors such as pharmacoeconomic analysis, market size, and affordability for both payers and patients based on national and per capita GDP.123 A third factor that would have based regulatory review on actual prices paid in Canada, taking into account confidential discounts and rebates provided to payers, was blocked by a Canadian federal court decision holding that PMPRB cannot mandate the reporting of third-party rebates.124 The international comparison uses 11 countries (Australia, Belgium, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom).125 USTR maintains these changes “would dramatical y reshape how the Patented Medicine Prices Review Board evaluates patented pharmaceuticals and sets their ceiling prices.” It maintains that the changes “would significantly undermine the marketplace for innovative pharmaceutical products, delay or prevent the introduction of new medicines in Canada, and reduce investments in Canada’s life sciences sector.”126 Government Procurement The Biden Administration’s commitment to domestic sourcing for U.S. government procurement may renew a periodic irritant in the U.S.-Canada bilateral economic relationship. On January 25, 2021, President Biden issued an executive order that aims to increase the procurement of domestic goods and services. It would centralize the process by which waivers for government 120 “Publication of Final Regulations on Patent Linkage and T erm Restoration,” Smart and Biggar, September 8, 2017. 121 Patent Medicine Prices Review Board (PMPRB), 2018 Annual Report, February 28, 2020. 122 PMPRB, 2018 Annual Report, February 28, 2020. 123 Pharmacoeconomic analysis is used to identify, measure and conduct cost -benefit analysis of programs, services, or therapies to determine the best health outcome for the resources invested. PMPRB, “ PMRB Framework Modernization,” presentation at Telus Health Annual Conference, March and April 2019. 124 T eresa Reguly and Eileen McMahon, “T he Wait Is Over: Canada’s PMPRB Releases Final Guidelines,” T orys LLC, November 2, 2020. 125 T he last revision of the list in 2019 dropped the United States and Switzerland. 126 UST R, 2020 Special 301 Report, April 2020, p.15. Congressional Research Service 32 Canada-U.S. Relations purchases of foreign-made products are granted and subject waiver requests to additional scrutiny. It also would seek to make changes to implementing regulations for domestic sourcing laws, such as the Buy American Act of 1933 (41 U.S.C. 8301 et seq.), by raising domestic content requirements and price preferences, and it would develop recommendations to expand domestic procurement policies to information technologies, among other provisions.127 Canada reportedly wil seek to negotiate exemptions to the proposed regulations.128 In general, the Buy American Act and various Buy American government procurement provisions in U.S. legislation restrict procurement contracts to the use of U.S.-made end products and construction materials. U.S. regulation defines domestic end products and construction materials as unmanufactured end products or construction materials produced in the United States or end products or construction materials in which the cost of the components mined, produced, or manufactured in the United States exceeds 55% of the cost of al components (and more than 95% for iron and steel products).129 Buy American provisions, which include transportation infrastructure funding, impose domestic content restrictions on federal y funded grant projects contracted at the state or local level (so-cal ed pass-through projects). Although federal y funded, these projects are not considered federal procurements. The Trade Agreements Act of 1979 (19 U.S.C. 2501 et seq.) permits some of these provisions to be waived for eligible or covered products and services from countries that  are parties to the WTO Agreement on Government Procurement (GPA);  have signed an FTA with the United States that provides reciprocal competitive government procurement opportunities to U.S. products, services, and suppliers; or  benefit from U.S. unilateral trade preferences (e.g., Caribbean Basin countries).130 As a signatory to the GPA, Canada receives nondiscriminatory treatment for covered procurement in the United States on its products and services. The GPA is a plurilateral agreement that binds only those WTO members that agree to undertake obligations under it. Furthermore, the GPA applies only to the sectors and procurement that the national government and subnational (e.g., states or provinces) government agencies agree to include in their schedule of national commitments, as wel as above a certain monetary threshold. Canadian firms and suppliers are eligible to bid on procurements under the above provisions. However, Buy American projects (described above) are not covered procurements under the agreement. NAFTA also contained a government procurement chapter. In USMCA negotiations, Canada sought to expand reciprocal procurement opportunities in the U.S. market, whereas the Trump Administration sought to restrict those opportunities or eliminate the chapter entirely. The final agreement retains a more limited government procurement chapter than NAFTA with respect to Mexico but excludes U.S.-Canada procurement. In seeking to maintain government procurement 127 Executive Order 14005, “Ensuring the Future Is Made in All of America by All of America’s Workers,” January 25, 2021, 86 Federal Register 7475, January 28, 2021. 128 Adrian Morrow and Stephen Chase, “Ottawa to Press Biden on Exemption from ‘Buy American’ Rules,” Globe and Mail, January 25, 2021. 129 For more information, see CRS In Focus IF11580, U.S. Government Procurement and International Trade, by Andres B. Schwarzenberg. 130 For more information, see CRS In Focus IF11651, WTO Agreement on Government Procurement (GPA), by Andres B. Schwarzenberg. Congressional Research Service 33 Canada-U.S. Relations opportunities in the United States, Canada has pointed to tightly integrated supply chains with Canadian finished products containing U.S. components and vice versa.131 In the USMCA debate, some U.S. firms expressed concerns that procurement opportunities under the GPA are not as extensive as those available to Canada’s other FTA partners in Europe and Asia, giving those countries an advantage in Canadian procurement opportunities over U.S. firms.132 Steel and Aluminum Tariffs On March 8, 2018, President Trump signed proclamations imposing tariffs on steel (25%) and aluminum (10%) on several nations under Section 232 of the Trade Expansion Act of 1962, as amended, after the Commerce Department determined that current imports threaten national security. Canada and Mexico initial y were excluded from the tariffs as an “incentive” to a favorable conclusion of the NAFTA renegotiations. Both Canada and Mexico rejected the linkage, and tariffs were imposed on both countries on June 1, 2018.133 Canada maintained that, as a part of the U.S. defense industrial base and a NATO al y, it should be excluded on national security grounds. Prime Minister Trudeau cal ed the tariffs “an affront to the longstanding security partnership between Canada and the United States, and, in particular, to the thousands of Canadians who have fought and died alongside American comrades in arms.”134 On May 31, 2018, Canada announced retaliatory tariffs of $12.8 bil ion to begin on July 1, 2018. U.S. steel and steel products faced tariffs of 25%; U.S. aluminum and a host of other U.S. consumer products faced 10% tariffs.135 The Canadian tariffs were targeted to extract maximum political cost. Canada brought a case chal enging the duties under WTO dispute settlement, and it sought recourse under NAFTA’s state-to-state dispute settlement mechanism.136 Canada subsequently dropped these cases. The signing of USMCA led to the withdrawal of al Section 232 steel and aluminum tariffs and related retaliatory tariffs in May 2019. At the same time, the USMCA partners announced a new monitoring mechanism to prevent surges in imports of steel and aluminum. USMCA also contained a side letter, which would exempt 2.6 mil ion vehicles and $108 bil ion of auto parts annual y from the possible imposition of any Section 232 tariffs on motor vehicles. The Trump Administration reimposed a 10% ad valorem aluminum tariff by proclamation in August 2020, after President Trump accused Canada of breaking a commitment to maintain stable levels of aluminum exports.137 Following the release of the Canadian retaliation list targeting $2.7 bil ion in U.S. aluminum and aluminum products, USTR rescinded the aluminum tariffs maintaining that imports from Canada were “likely to normalize” in the remainder of 2020.138 131 Kate Bolongaro, “ Canada Worries About Biden’s ‘Buy American’ After Keystone Blow,” Bloomberg Government, January 24, 2021. 132 USMCA Agreement: Addendum to the Earlier (September 28, 2018) Report of the Industry Trade Advisory Com m ittee on Autom otive Equipm ent and Capital Goods, October 24, 2018. 133 “Canada, Mexico Reject Linkage of Steel, Aluminum T ariffs to NAFT A T alks,” Inside U.S. Trade, March 16, 2018. 134 Justin T rudeau, Prime Minister of Canada, “Remarks by the Prime Minister of Canada on Steel and Aluminum T ariffs Imposed by the United States,” May 31, 2018. 135 Department of Finance Canada, “Notice of Intent to Impose Countermeasures Action against the United States in Response to T ariffs on Canadian Steel and Aluminum Products,” press release, May 31, 2018. 136 Global Affairs Canada, “Canada Files World T rade Organization and North American Free T rade Agreement Litigation in Response to Illegal U.S. T ariffs,” press release, June 1, 2018. 137 “T rump Confirms He Will Re-impose T ariffs on Canadian Aluminum,” Inside U.S. Trade, August 6, 2020. 138 UST R, “UST R Statement on Canadian Aluminum,” press release, September 15, 2020. Congressional Research Service 34 link to page 39 Canada-U.S. Relations Energy Canada is the United States’ largest supplier of imported energy, with equivalent rights of appeal.⁹⁵

Wine Exports

Energy

Canada is the United States' largest supplier of imported energy—including oil, uranium, natural gas, and electricity. In 20162019, Canada was the world's fourth’s fifth-largest petroleum producer; its reserves the country’s reserves—largely in the form of bitumen oil reserves—are believed to be the third largest in the world, after those of Venezuela and Saudi Arabia.¹⁰⁴ In 2017139 In 2020, the value of U.S. petroleum and natural gas imports from Canada was $53 billion, declining from a peak of $115.7 billion in 2014.55.2 bil ion, fal ing from a peak of $112.4 bil ion in 2014.140 This figure largely represents the fallingfal ing value of crude oil and natural gas, in part due to growing production in the United States from shale. WhileAlthough the value of crude oil imports has dropped, the volume of trade hashad continued to increase (seeuntil 2020 (see Table 2)3). In 2017, 2020, Canada provided 51.261.1% of U.S. crude oil imports (up from 22% in 200919.96% in 2010)—about 1.2 million 3 bil ion barrels/day—and supplied 57.987.6 % of U.S. natural gas imports (up from 51.2% in 2009).¹⁰⁵.141 Canada is the largest supplier to the United States of processed uranium. Canada also is a net exporter of electricity to the United States through a heavily connected North American electricity grid. Canada is particularly valued because it is considered a reliable source of energy, as it is not a member of OPEC. One consequence of the bilateral oil and gas relationship is a lesser dependence on the rest of the world.

Keystone XL Pipeline

After being denied a Presidential Permit by the Obama Administration in 2015, the Keystone XL Pipeline has been revived by the Trump AdministrationCanadian electricity is primarily renewable (60% hydro, 7% solar and wind) and, along with nuclear (15%), non-GHG-emitting generation makes up 82% of supply.142 Many analysts consider Canada to be a particularly valuable energy partner for the United States, because Canada provides a reliable supply (it is not a member of OPEC) and reduces U.S. dependence on the rest of the world. Table 3. U.S. Crude Oil Imports from Canada: 2016-2020 2016 2017 2018 2019 2020 Value (bn$) 36.2 50.1 60.8 62.7 42.7 Volume (mil ion 1,099.3 1,211.6 1,255.2 1,338.5 1,275.5 barrels) % of total 39.0 41.9 46.6 56.2 61.1 imports (barrels) Source: Trade Data Monitor, General Imports. Keystone XL Pipeline143 Upon inauguration, President Biden revoked the required presidential permit for the cross-border construction of the Keystone XL pipeline, complicating the controversial pipeline’s future.144 The permit al owed for the construction of a 1.4-mile stretch over the border, which has been completed, but also for its operation, which has yet to commence. The President’s action is the latest roadblock for the pipeline. Original y, the Obama Administration denied a presidential permit in 2015. The Trump Administration revived the pipeline, issuing new permits in 2017 and 2019. Opponents of the pipeline, including environmental, agricultural, and landowner interests, 139 Energy Information Administration, “Canada Analysis Executive Summary,” October 7, 2019. 140 Data based on Harmonized T ariff Schedule codes 2709, 2710, and 2711. 141 U.S. Census Bureau data, as presented by Trade Data Monitor, accessed February 2021. 142 Natural Resources Canada, “Electricity Facts,” October 6, 2020. 143 For more information, see CRS Insight IN11445, Keystone XL Pipeline: The End of the Road?, by Paul W. Parfomak. 144 Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to T ackle the Climate Crisis,” 86 Federal Register 7037-7043, January 25, 2021. Congressional Research Service 35 link to page 41 Canada-U.S. Relations chal enged those permits in U.S. courts, further delaying construction. If completed, Keystone XL . If completed, Keystone XL would be the main new pipeline to bring Canadian oil (primarily bitumen) to the United States. On March 23, 2017, the State Department issued a Presidential Permit for the border-crossing facilities of the pipeline, and the Nebraska Public Service Commission approved an alternative mainline route through Nebraska on November 20, 2017. Canada supports construction of the pipeline, but has raised concerns about proposals to restrict procurement for the building of the pipeline to U.S. firms. The pipeline has drawn opposition from environmental, agricultural, and landowner interests. While there continues to be ongoing litigation regarding the pipeline, Trans-Canada has begun preconstruction work—such as surveying—on the route, but has yet to commit to build the pipeline itself.

to the United States. The Trudeau government has maintained a delicate balance on Keystone XL, continuing to support pipeline construction while pursuing other aspects of the government’s climate strategy (see “Climate Change,” below). Prime Minister Trudeau expressed muted criticism of the cancel ation, stating, “While we welcome the President’s commitment to fight climate change, we are disappointed but acknowledge the President’s decision to fulfil his election campaign promise on Keystone XL.”145 Leaders of the oil producing provinces criticized the move, with Alberta Premier Jason Kenney describing the action as a “gut punch” to U.S.-Canada trade relations and cal ing on the Canadian federal government to impose trade sanctions on the United States if the decision is not reconsidered.146 The Alberta government was a stakeholder in the project, investing C$1.5 bil ion (approximately $1.2 bil ion) in the pipeline’s provincial construction.147 TC Energy, the owner of the pipeline, announced it is suspending the project and laying off 1,000 workers on both sides of the border, while assessing its future options.148 The company could seek compensation under NAFTA’s legacy ISDS provisions, seek redress in U.S. courts, or encourage the Canadian government to bring a case under USMCA’s state-state dispute settlement chapter. Trans-Mountain Pipeline The controversy over Keystone XL arguably has heightened the importance of the interprovincial Trans-Mountain Pipeline for the Canadian petroleum industry. However, the fate of that pipeline’s expansion isTrans-Mountain Pipeline

The fate of the Trans-Mountain expansion pipeline is still unclear. In November 2016, Prime Minister Trudeau announced the approval of a project to expand the Trans-Mountain pipeline expansion projectPipeline through British Columbia to Vancouver; oil may eventually flow through it to China and Asia Vancouver, which may result in increased exports to China and other Asian markets. The project has been beset with delays and controversy from its inception. It has pitted the owners of the pipeline—Kinder Morgan, a Houston-based energy infrastructure firm—pipeline owners and oil sands producers seeking additional ways to export bitumen against environmentalists, climate activists, and manysome, but not allal , First Nation tribes. It has also bands (tribes). It also has produced acrimony between the provincial governments of Alberta, which wants the project to proceed, and British Columbia, which does not. British Columbia has sought a court reference to its Supreme On May 29, 2018, Canada’s federal government announced it would buy the existing pipeline and the expansion project for C$4.5 bil ion (about $3.5 bil ion) from U.S. pipeline firm Kinder Morgan to complete the project as a Crown corporation. Later that year, the Federal Court of Appeal overturned the government’s first approval of the pipeline, citing insufficient consultation with certain First Nations bands and an improper assessment of its effect on marine life. A subsequent approval also was chal enged by First Nations bands, but the Supreme Court of Canada declined to review a Federal Court of Appeals ruling upholding the government’s second approval in July 2020.149 145 Justin T rudeau, Prime Minister of Canada, “Statement by the Prime Minister of Canada on the United States’ Decision on the Keystone XL Project,” January 20, 2021. 146 Ashley Joannou and Lisa Johnson, “ Kenney Calls on Federal Government to Impose T rade Sanct ions If Biden Does Not Review Keystone XL Decision,” Edm onton Journal, January 21, 2021. 147 Government of Alberta, “Investing in Keystone XL Pipeline,” 2021. 148 T C Energy, “T C Energy Disappointed with Expected Executive Action Revoking Keystone XL Presidenti al Permit,” press release, January 21, 2021; and “T C Energy to Cut 1,000 Keystone XL Jobs,” Toronto Star, January 22, 2021. 149 “Supreme Court Dismisses First Nations’ Challenge Against T rans Mountain Pipeline,” CBC News, July 2, 2020. Congressional Research Service 36 link to page 48 link to page 41 link to page 46 link to page 41 link to page 41 Canada-U.S. Relations Environmental and Transboundary Issues The United States and Canada have concluded a wide array of environmental and natural resources agreements at the federal, state/provincial, and local levels to manage transboundary issues. In recent years, some Members of Congress have examined the work of the International Joint Commission (IJC), a binational organization created by the 1909 Boundary Waters Treaty to investigate and recommend solutions to transboundary water concerns, including those facing the Great Lakes (see “Great Lakes”). Others have tracked negotiations over potential modifications to the Columbia River Treaty, which provides for the cooperative development and operation of the water resources of the Columbia River Basin in the northwestern United States and southwestern Canada (see CRS Report R43287, Columbia River Treaty Review). President Biden and Prime Minister Trudeau have pledged to work together to combat climate change, which could include increased cooperation in the Arctic (see “Climate Change” and “The Arctic”). Appeal for a clarification of its legal ability to restrict transportation of oil sands through the province. The Alberta government, in turn, has voted to enact legislation to permit the government to create a licensing system to regulate the export of natural resources through pipeline, truck, or rail. Through this legislation, which has yet to receive royal assent, Alberta conceivably could cut off its fuel exports to BC. Meanwhile, the federal government intends to enact legislation to reassert its authority over interprovincial pipelines.¹⁰⁶

Environmental and Transboundary Issues

Climate Change

Climate Change Canada and the United States have experienced similar political debates over whether and how to address greenhouse gasGHG-induced climate change. Both populations emit among the highest levels of greenhouse gases (GHG)GHG per person worldwide due to a number of factors, including high income and consumption levels, dependence on personal vehicles and trucking, long travel distances, and cold winters (see Table 4). Further, national infrastructures were constructed in the context of inexpensive and generally general y abundant fossil fuels, which are responsible for the majority of GHG emissions. Both countries also have regions strongly dependent on producing and processing fossil fuels. Other regions depend on importing energy from other provinces or countries, or use hydropower for electricity generation. Regulation of energy is primarily a provincial or state authority in both Canada and the United States. Environmental protection authorities are shared by the federal and subfederal levelssub-federal governments in both countries. Canada has typicallytypical y has sought policies compatible with those of the United States with the understanding that there could be significant economic benefits in harmonizing aspects of GHG and other pollution control strategies in order to facilitate trade and make compliance easier for transnational businesses. Table 4. Selected Greenhouse-Gas (GHG) Emissions Indicators in Canada and the United States Canada United States Total GHG Emissions in 2017 0.7 Gt CO2e 5.7 Gt CO2e GHG Emissions per Capita in 2017 18.9 t CO2e 17.7 t CO2e GHG Emissions per GDP in 2017 419 t CO2e 295 t CO2e Share of Global CO2 Emissions 1.67% 14.7% Related to Energy in 2018 Share of Global GDP in 2019 1.4% 15.8% Sources: For 2017 data, World Resources Institute, Climate Watch, “Country Profiles,” using al GHG and land use, land use change, and forestry emissions and removals, at https://www.climatewatchdata.org/countries/. For 2018 data, International Energy Agency, Key World Energy Statistics 2020, pp. 60-69. For 2019 data, World Bank, “DataBank” using GDP (PPP in constant 2017 $). Notes: CO2 = carbon dioxide; CO2e = carbon dioxide-equivalent; GDP = gross domestic product. Both nations also perceive certain vulnerabilities to climate change, including increasing forest and habitat losses and fires, public health effects of heat episodes and expanding disease vectors, increasing costs of cooling, and risks to coastal communities due to more intense storms and sea- Congressional Research Service 37 link to page 46 Canada-U.S. Relations level rise. Shrinking sea-ice extent in the Arctic brings opportunities and concerns for both countries, due to the effects on indigenous populations and increased commercial activity, shipping, tourism, and risks of associated accidents, as wel as dramatical y changing ecosystems (see “The Arctic,” below). Paris Agreement Commitments The Paris Agreement (PA) is a subsidiary agreement to the 1992 United Nations Framework Convention on Climate Change. Both the United States and Canada became Parties to the Paris Agreement when it entered into force on November 4, 2016. The U.S. withdrawal from the PA became effective November 4, 2020, after President Trump, citing a campaign promise, announced his intention to withdraw from the PA in June 2017. In 2017, Prime Minister Trudeau cal ed President Trump’s decision “disheartening,” stating that “Canada stands united with al the other parties.” He also pledged that “Canada wil transnational businesses.

Paris Agreement Commitments

On June 1, 2017, President Trump, citing a campaign promise, announced his intention to withdraw from the PA. Three months later, in August 2017, the U.S. State Department submitted an official notice to the United Nations declaring its intent to withdraw from the accord.¹⁰⁸ Under the PA, the United States may formally submit its intent to withdraw in November 2019, and the withdrawal would take effect one year after that notice. Prime Minister Trudeau called President Trump's decision "disheartening," stating that "Canada stands united with all the other parties," and pledged that "Canada will continue to work with the United States at the state level, and with other U.S. stakeholders, to address climate change and promote clean growth.”150 President Biden accepted the Paris Agreement upon his inauguration, making the United States again a Party as of February 19, 2021. Prime Minister Trudeau welcomed the decision.151 The negotiators intended the PA to be legal y binding on its Parties, though not al provisions in it are mandatory. The PA requires Parties to communicate Nationally Determined Contributions (NDCs) identifying how each Party intends to abate its GHG emissions, with a target and current time horizon of 2030. Each government decides its own pledge. Al PA emissions targets are voluntary and nonbinding, although the PA contains provisions to encourage their achievement. Parties also should set goals to adapt to climate change and should cooperate toward the PA objectives, including mobilization of financial and other support. The financial commitments and others are hortatory or collective commitments to which it would be difficult to hold an individual party accountable. The Canadian government submitted an updated NDC to the Paris Agreement in May 2017.152 Under it, Canada committed to reduce GHG emissions by 30% below 2005 levels by 2030. Canada’s commitment is economy-wide in scope, covering 100% of Canada’s GHG inventory; it growth."¹⁰⁹

Pan-Canadian Framework (PCF)

According to its NDC, Canada intends to reduce GHG emissions by 30% below 2005 levels by 2030. Canada's commitment is economy-wide in scope, covering 100% of Canada's GHG inventory. This includes carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), sulfur hexafluoride (SF₆), perfluorocarbons (PFCs), hydrofluorocarbons (HFCs), and nitrogen trifluoride (NF₃) emissions from all al sectors covered by the internationallyinternational y accepted guidelines of the Intergovernmental Panel on Climate Change (IPCC).

. In June 2019, the House of Commons passed a motion declaring a climate emergency and reiterating its support for achieving climate goals.153 Canada has taken several steps to achieve these GHG -emission reductions. Since 2006, the Canadian government has established more stringent emissions standards for heavy -duty vehicles, passenger automobiles, and light trucks, and instituted renewable fuels regulations that require gasoline to contain an average of 5% renewable fuel content. It also has implemented electricity sector regulations that ban the construction of traditional coal-fired generating units and will phase out existing coal-fired units that are unable to capture and store carbon.¹¹⁴

U.S.-Canada GHG Emissions Cooperation

Columbia River Treaty¹¹⁹

Great Lakes