Order Code RL33087
CRS Report for Congress
Received through the CRS Web
United States-Canada Trade and Economic
Relationship: Prospects and Challenges
September 14, 2005
Ian F. Fergusson
Analyst in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

---

United States- Canada Trade and Economic
Relationship: Prospects and Challenges
Summary
The United States and Canada conduct the world’s largest bilateral trade
relationship, with total merchandise trade (exports and imports) exceeding $443.6
billion in 2004. The U.S.-Canadian relationship revolves around the themes of
integration and asymmetry: integration from successive trade liberalization from the
U.S.- Canada Auto Pact of 1965 leading to NAFTA, and asymmetry resulting from
Canadian dependence on the U.S. market and from the disparate size of the two
economies.
The economies of the United States and Canada are highly integrated, a process
that has been accelerated by the bilateral U.S.-Canada free trade agreement (FTA) of
1988 and the North American Free Trade Agreement (NAFTA) of 1994. Both are
affluent industrialized economies, with similar standards of living and industrial
structure. However, the two economies diverge in size, per capita income,
productivity and net savings.
Canada is the largest single country trading partner of the United States. In
2004, total merchandise trade with Canada consisted of $255.9 billion in imports and
$187.7 billion in exports. While Canada is an important trading partner for the
United States, the United States is the dominant trade partner for Canada, and trade
is a dominant feature of the Canadian economy. Automobiles and auto parts, a sector
which has become highly integrated due to free trade, make up the largest sector of
traded products. Canada is also the largest exporter of energy to the United States.
Like the United States, the Canadian economy is affected by the transformation of
China into an economic superpower. The U.S. trade deficit with Canada has
continued to increase, and thus far has not been affected by the nearly 30% rise in the
Canadian dollar since 2002. The United States and Canada also have significant
stakes in each other’s economy through foreign direct investment.
Both countries are members of the World Trade Organization (WTO) and both
are partners with Mexico in the NAFTA. While most trade is conducted smoothly,
several disputes remain contentious. Disputes concerning softwood lumber, wheat
and the disposition of antidumping duties (the Byrd Amendment) have been
addressed by dispute settlement bodies at the WTO and NAFTA. In addition, U.S.
regulatory proceedings restricted the importation of Canadian beef (now lifted), and
the United States has placed Canada on its Special 301 watch list over intellectual
property rights enforcement.
The terrorist attacks of 2001 focused attention on the U.S.-Canadian border.
Several bilateral initiatives have been undertaken to minimize disruption to
commerce from added border security. The focus on the border has renewed interest
in some quarters in greater economic integration, either through incremental
measures such as greater regulatory cooperation or potentially larger goals such as
a customs or monetary union. Congressional interest has focused on these disputes,
and also on the ability of the two nations to continue their traditional volume of trade
with heightened security on the border. This report will be updated periodically.

---

Contents
The Economies of the United States and Canada . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Trade and Investment Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Autos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Canadian FDI Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Softwood Lumber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Byrd Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Intellectual Property Rights (IPR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Wheat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Security and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Action Programs and Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Prospects and Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Economic Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
NAFTA Plus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Security Perimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Customs Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Common Market or Economic Union . . . . . . . . . . . . . . . . . . . . . . . . . 22
Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. FDI Flows 1997-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 2. FDI Stock 1997-2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. Inward FDI Flows from All Countries: 1997-2003 . . . . . . . . . . . . . . . 10
Figure 4. U.S. Trade Deficit with Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. Selected Comparative Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Productivity Conundrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 2. U.S. Merchandise Trade With Canada, 2004 . . . . . . . . . . . . . . . . . . . . . 7

---

United States-Canada Trade and Economic
Relationship: Prospects and Challenges
The Economies of the United States and Canada
The economies of the United States and Canada are highly integrated, a process
that has been accelerated by the bilateral U.S. -Canada free trade agreement (FTA)
of 1989 and the North American Free Trade Agreement (NAFTA) of 1994. The two
countries are natural trading partners, given their geographic proximity and their
(partial) linguistic and cultural similarities. Because 80% of the Canadian
population lives within 200 miles of the U.S. border and due to the impediments of
Canadian geography, trade with the United States is often easier and less expensive
than Canadian inter-provincial trade. Both are affluent industrialized economies,
with similar (though not identical ) standards of living.
However, the economies of the two countries diverge in numerous ways. First,
the United States economy dwarfs that of Canada. U.S. gross domestic product
(GDP) is over 12½ times that of Canada in nominal terms and 10 times that of
Canada in terms of purchasing power parity.1 (See Table 1.) This large and historic
disparity has presented opportunities and challenges for Canada. NAFTA provides
Canada with a large market for its exports at its doorstep, however it has also led to
increased import competition for small-scale Canadian businesses. The Canadian
economy is also disproportionately impacted by a U.S. economic slowdown or
changes in the bilateral exchange rate.
Per capita GDP in Canada also trails that of the United States. Over the ten year
period 1994-2003, Canada’s growth rate outpaced that of the United States; however,
since 2003 the trend has reversed with U.S. growth rates outpacing those of Canada.
The persistent per capita income gap has proven worrisome to Canadian
policymakers raising questions about Canadian productivity and competitiveness (see
box, p.3).
In terms of sectoral components of GDP, the U.S. and Canada are similar. Over
two-thirds of both economies are devoted to the services sector, although the sector
is relatively larger as a percentage of GDP in the United States (79% - 69%). The
manufacturing sector’s composition of GDP has fallen in both countries over time,
but it is still relatively more important to the Canadian economy (29%-20%).
1 Purchasing power parity (PPP) is a theory which states that exchange rates between
currencies are in equilibrium when their purchasing power is the same in each of the two
countries. PPP is useful for cross-country comparisons because its measurement excludes
exchange rate volatility and speculation.

---

CRS-2
Agriculture makes up the remaining two percent of the Canadian economy and one
percent of the U.S. economy.
In terms of savings and investment, Canada and the United States have
diverged. Canada’s experience with fiscal profligacy in the 1970s and 1980s caused
the country to eschew deficit spending. It has had a public sector surplus for eight
years and has lowered its ratio of public debt-to-GDP from 100% of GDP in 1996 to
70.7% of GDP in 2004. The United States has a lower ratio of debt-to-GDP, but it
is trending upward with current fiscal policies. Personal savings rates in both the
United States and Canada have been decreasing over time, reaching to 1.7% and
5.4%, respectively, in 2002.2
Table 1. Selected Comparative Statistics
Indicator
United States
Canada
GDP (2004)
Nominal (billion US$)
11,735
994
Purchasing power parity
11,735
1,051
(PPP) (billion $)
Per Capita GDP (2004)
Nominal ($)
40,050
31,110
PPP ($)
40,050
32,880
Real GDP Growth (2004)
4.4%
2.8%
Average Annual GDP
3.32%
3.34%
Growth Rate (1994-2003)
Recorded Unemployment
5.5%
7.2%
Rate (2004)
Exports (%GDP)
7.0%
31.9%
Imports (%GDP)
12.6%
28.1%
Sectoral Components of
GDP (%)
Industry
20.0%
29.0%
Services
79.0%
69.0%
Agriculture
1.0%
2.0%
Current Account Balance
-5.7%
2.6%
(% GDP)
Public Debt/GDP
63.7%
70.8%
Sources: Economist Intelligence Unit; Bureau of the Census; Bureau of Economic Analysis; Statistics
Canada
Some of the differences between U.S. and Canadian economic performance may
be traced to the differences in the role and structure of the government in economic
2 IMF Article IV Staff Reports: Canada (March 2004) p. 27, United States (July 2004), p.
6.

---

CRS-3
life. While both countries can be identified as generally free-market capitalist
economies, at times Canada has adopted more interventionist economic policies.
Prior to the FTA with the United States, Canada protected her small-scale
manufacturing enterprises that produced solely for the domestic market with high
tariffs. While these plants provided jobs to Canadian workers, they resulted in higher
prices for Canadian consumers and led to an inefficient allocation of national
economic resources. Canada has also provided its citizens with a more generous
social safety net including a government-run national health service. Canadian
citizens pay higher taxes to receive these benefits, but private industry is relieved of
providing health care coverage.
A different relationship between the Canadian federal government and the
provinces also affect economic dynamics. Canadian provinces have relatively more
power vis-a-vis Canada’s federal government, than that of U.S. states. For example,
natural resources are under the policy control (and in many cases, ownership) of
Canadian provincial governments. In the softwood lumber dispute, provincial
ownership and management of forests have made the provincial governments key
players in the negotiations. Alberta’s vast energy reserves may also cause friction
between it and other “have-not” provinces without similar resource endowments. The
Canadian federal government attempts to provide a uniform level of services across
the provinces by providing “equalization” payments to poorer provinces, however,
these payments are a source of continuous squabbling between the provinces, on one
side, and the federal government.
The Trade and Investment Relationship
Canada is the largest single nation trading partner of the United States. In 2004,
total merchandise trade with Canada was $443.6 billion, consisting of $255.9 billion
in imports and $187.7 billion in exports.3 Trade with Canada represented nearly
19.4% of U.S. total trade in 2004, with Canada purchasing 23.0% of U.S. exports and
supplying 17.4% of total U.S. imports in 2004. While Canada is an important trading
partner for the United States, the United States is the dominant trade partner for
Canada. The United States supplied 67.0% of Canada’s imports of goods and
services, and purchased 78.7% of Canada’s exports of goods and services in 2004.
Trade is a dominant feature of the Canadian economy. While in the United
States, the value of trade (exports + imports) as a percentage of GDP was about 21%
in 2004, the comparable figure for Canada was about 58%. Canada’s goods exports
represent 31% of Canadian GDP and exports to the United States alone represent
27% of Canadian GDP. A further 16% of Canadian GDP is used to purchase U.S.
goods. Canada is much more exposed to the world economy and to the fortunes of
other economies, foremost the United States.
3 Trade figures are expressed in terms of general imports (customs value), and total exports
(FAS value) as compiled by the U.S. International Trade Commission. Canadian figures are
from Statistics Canada.

---

CRS-4
Autos and auto parts are the top
The Productivity Conundrum
U.S. exports to, and imports from,
Canada. Computer equipment,
Economists have long noticed that measures
electrical equipment, engines,
of productivity are generally lower in Canada than
turboengines, recorded media, optical
in the United States, and that this disparity has
equipment and precision instruments
persisted despite the increasing level of
are other major U.S. exports.
integration between the two nations’ economies.
Productivity typically is measured as output per
Primary U.S. imports from Canada
input (single-factor productivity) or as a bundle of
outside the automotive sector are
inputs (total-factor productivity). Productivity
energy (natural gas, petroleum
typically measures output per unit of labor or per
products, electricity), engines, aircraft
unit of capital. Total factor productivity measures
equipment, wood, and paper
the residual after accounting for capital and labor,
which accounts for technological change or
products.
innovation. These measures are important
because over time, productivity improvement is an
That the United States and
important determinant of a nation’s living
Canada trade substantial volumes of
standard or its level of real income and growth
the same goods bespeaks the
According to two recent studies, Canada’s
economic integration of the two
lower productivity accounts for the largest
economies. This integration has been
component of the income gap between the United
assisted by trade liberalization over
States and Canada. They note that Canada has
the past 35 years, beginning with the
invested less in machinery and equipment per
worker since the 1980s, resulting in less capital
Automotive Agreement of 1965
intensity (less capital per worker). Canada’s
(which eliminated tariffs on
research and development (R&D) as a proportion
shipments of autos and auto parts
of GDP is lower than that of the United States and
between the two countries), through
other OECD countries. Usage of information and
the Canada-U.S. Free Trade
communications technology (ICT) is also less
extensive than the United States, although the
Agreement of 1989 (FTA), and
OECD reports that Canada ranks third in OECD
NAFTA. Under the FTA (which was
countries after the United States and Sweden in
incorporated into NAFTA), bilateral
ICT application. While Canada ranks favorably to
tariffs except for certain agricultural
the United States in primary and secondary
educational attainment, Canadians fall behind
products were phased out over a 10-
their American counterparts in the attainment of
year period culminating in 1998.
university or advanced degrees and in
opportunities for on-the-job training or continuous
The elimination of tariffs and
education. Finally, industrial organization also
the reduction of nontariff barriers
plays a part. According to the Conference Board
of Canada, Canadian manufacturers are more
have contributed to the process of
heavily concentrated in lower productivity growth
specialization, as each country is able
industries. Smaller enterprises (SME) are
to produce goods for a larger
generally less productive than larger ones, and
continent-wide market. Thus, firms
SMEs are a greater share of Canadian
are able to improve productivity
manufacturing and employment. Canadian plants
of foreign firms are generally more productive
through increased economies of scale
than indigenous companies, perhaps because they
and coordinated production. Such
import best-practices and technical know-how
specialization led to increased
from their home operations. This may account for
bilateral trade, much of it in
the productivity prowess of Canadian auto
operations.
intermediate products. One study
estimated that about 45% of U.S.-
Organization of Economic Cooperation and
Canadian trade was intra-firm trade,
Development, OECD Economic Surveys: Canada,
2004; Conference Board of Canada, Performance and
reflecting the substantial integration
Potential 2003-4: Defining the Canadian Advantage.
of the two economies and

---

CRS-5
contributing to increased efficiency and competitiveness of firms on both sides of
the border.4
Autos. Integration of the U.S. and Canadian automotive industries is an
example of the benefits of specialization and economies of scale. Before the mid-
1960s, each country’s industry produced for its own market, due largely to tariffs
imposed by both countries. Canadian auto firms (actually subsidiaries of U.S. firms)
were considerably less productive than their U.S. counterparts because Canadian
firms produced a variety of differentiated products for a relatively small domestic
market in an industry characterized by economies of scale.
The Automotive Agreement of 1965 (Auto Pact) between the United States and
Canada began the process of integration by eliminating tariffs on shipments of autos
and auto parts between the two countries. Thus, each country’s industry could
specialize in a smaller number of products and use longer production runs.
Coordinated production on both sides of the border increased significantly, as did
bilateral automotive trade. Coordinated automotive production has raised living
standards in both the United States and Canada, and has strengthened the global
competitiveness of producers on both sides of the border.
Motor vehicles, vehicle parts, and engines make up nearly 23% of U.S. exports
to Canada and 25% of imports from Canada to the United States (see Table 2, p.7).
Although vehicles and parts flow in both directions, the primary trajectory is that of
U.S. parts exported to Canada for assembly, and vehicles exported back to the United
States. In 2004, 2.05 million vehicles were imported from Canada. While Canada
suffers from productivity problems in other sectors of its economy, its automotive
plants are among the most competitive in North America. Part of the cost advantage
traditionally has been due to the weak Canadian dollar (also known as the “loonie”
due to representation of a loon on the C$1 coin), and that advantage has diminished
with the loonie’s 27% appreciation since 2002. Another major competitive
advantage is Canada’s national health system, which relieves the auto makers of
approximately $1,400 in costs per vehicle.5 However, one recent report suggested
that the price advantage to Canadian production is dwindling, down to $250 per
vehicle in 2003 from $400 in 2000.6
Energy. Canada is the largest supplier of energy (including petroleum, natural
gas, and electricity) to the United States. While the dollar value of U.S. imports of
Canadian crude oil and natural gas increased nearly 250% since 1998, the volume in
terms of barrels has also increased nearly 22%. Canada has traditional sources of
crude oil in Alberta and off the coasts of Newfoundland and Nova Scotia. As the
price of crude oil increases, petroleum extracted from Albertan oil sands are
becoming a major part of Canadian energy supplies. Oil sands are surface mined,
4 World Trade Organization, Trade Policy Review: Canada, Report by the Secretariat,
October 6, 1996, (WT/TPR/S/22), p.6.
5 “Ontario to Overtake Michigan As Auto Kingpin,” The New York Times, November 29,
2004.
6 Scotiabank Canadian Auto Report, June 28, 2005.

---

CRS-6
and the oil is extracted through pressurization. The process itself is energy intensive,
water dependent, and not all that environmentally friendly. However, it is estimated
that the potential oil extracted from the oil sands represent reserves second only those
held by Saudi Arabia. Their importance as a source of supply for U.S. energy needs
was underscored by the July 2005 visit of Treasury Secretary John Snow. Provisions
of the FTA and NAFTA assure free trade in energy by prohibiting imposition of
minimal export prices or export taxes, and restrict the imposition of supply
restrictions.
China. China’s emergence as an economic superpower and the United States
response has become a major issue in the United States. In Canada, political
discussion has been more muted, but some of the same issues are present. China is
now Canada’s third largest trading partner, after Japan, and is growing rapidly.
However, most of this increase is import-based. In 2004, Canada imported $18.6
billion in goods from China, primarily a typical array of labor intensive products:
apparel, footware, consumer electronics, toys, and telecommunications equipment.
Meanwhile, Canada’s exports to China totaled $5 billion, primarily natural resources:
forest products, metals, petroleum, and agriculture, but also aviation equipment and
telecommunications equipment.
Canadians and Americans have similar concerns over the loss of manufacturing
jobs in income competing industries to low-wage producers such as China. Perhaps
more important, however, is the concern that Canadian producers will be pushed out
of the U.S. market by low-wage competition. One study found that while such a
threat is real, China now competes more with Mexico in labor intensive sectors than
does Canada in the U.S. market.7
China’s near unquenchable thirst for natural resources to fuel its economic
boom has led it to attempt to purchase natural resource assets abroad, including a
controversial bid for Unocal in the United States. Canadian firms have also become
a target for takeovers by Chinese companies, and may now become more so in the
wake of China National Offshore Oil Company’s (CNOOC) withdrawal of its bid for
Unocal. Two Chinese oil companies, including CNOOC, have purchased stakes in
Alberta’s oil sands projects, and a pipeline is to be constructed in conjunction with
PetroChina from Alberta to the West Coast. An attempted Chinese purchase of
Noranda (now Falconbridge), one of the world’s largest zinc, nickel, and copper
concerns, by China Minmetals was called off in 2004 due to rising share prices.
However, the proposed deal did spark concern about purchase of Canadian resources
by a subsidiary of the Chinese Metals Ministry and about the company’s human
rights and Communist party ties.8
Trade Deficit. The U.S. merchandise trade deficit with Canada in 2004
increased 24.7% from 2003 to a record $68.2 billion. Imports have been growing
faster than exports as well. In the free trade era since 1989, the value of imports over
7 Wendy Dobson, “Taking A Giant’s Measure: Canada, NAFTA, and an Emergent China,”
C.D. Howe Institute, September 2004.
8 “Canada Welcomes China’s Cash - Hospitality Toward Investments Run Counter to Mood
in U.S.,” Wall Street Journal, July 15, 2005.

---

CRS-7
exports increased from 3.5% of the value of total trade in 1991 to 15.4% in 2004. The
increasing trade deficit with Canada has been blamed on many factors. Up until
2003, the persistent trade deficit had been attributed, in part, to a weakness of the
Canadian dollar. The loonie had steadily depreciated in value in the decade prior to
2003. Worth approximately $.84 at the time of the U.S.-Canada Free Trade
Agreement in 1989, the currency briefly sank to $.63 in 2002. The loonie bounced
back to $.71 in 2003 and $.75 in 2004. In 2004, at least, the depreciating U.S. dollar
— which should make cheaper U.S. goods more attractive on the Canadian market
— did not have an ameliorative effect on the U.S. - Canadian trade deficit. Another
reason for the stickiness of the trade deficit may be that, for some goods, there are no
longer U.S.- produced substitutes, so consumers must continue to purchase more
expensive imported substitutes.9 However, increased prices for natural resources and
energy, attributed to the global expansion and Chinese development may account for
both the loonie’s strength and the persistent U.S. trade deficit in 2004 with Canada.
The relatively high value of Canada’s currency hit the country’s manufacturing base,
dampening exports, job creation and production in 2004. However, the pace of
capital spending has increased due to cheaper machinery imports, leading perhaps to
future productivity gains.10
Services. The United States also conducts a substantial services trade with
Canada. In 2003, the United States exported $26.7 billion worth of services to
Canada and imported $19.1 billion, for a surplus of $7.6 billion. Canada is the third
largest recipient of U.S. service exports after the United Kingdom and Japan,
accounting for 9% of U.S. service exports. Service imports from Canada represent
about 8% of total U.S. service imports, and ranks second, in magnitude, after the
U.K. In 2003, U.S. service exports represented 60% of Canadian service imports, and
Canadian service exports to the United States represented 59% of total Canadian
service exports.11
Table 2. U.S. Merchandise Trade With Canada, 2004
Export Category
Amount (billions)
Import Category
Amount (Billions)
Motor parts
$25.2
Motor Vehicles
$40.8
Motor Vehicles
17.9
Oil and Gas
$40.1
Computer
$7.5
Vehicle Parts
$17.1
Equipment
Semiconductors
$5.5
Pulp, Paper,
$10.0
Paperboard
Machinery
$5.5
Returned/Reimport
$9.7
ed
9 “ Falling Dollar Fails to Narrow U.S. Trade Gap,” Financial Times, March 11, 2004.
10 Scotiabank, Global Economic Research, NAFTA Quarterly, Winter 2005.
11 U.S. Bureau of Economic Analysis, Survey of Current Business, October 2004;
Industry Canada, Trade and Investment Monitor 2004,
[http://strategis.ic.gc.ca/epic/internet/ineas-aes.nsf/en/h_ra01873e.html]

---

CRS-8
Export Category
Amount (billions)
Import Category
Amount (Billions)
Chemicals
$5.0
Sawmill and Wood
$7.4
Products
Instrumentation
$3.9
Petroleum and
$7.1
Coal Products
Agriculture/
$5.0
Aerospace
$6.7
Construction
Products and Parts
Machinery
Plastics Materials/
$5.0
Special
$6.2
Resins/ synthetic
Classification
fibers
Electrical/
$4.7
Nonferrous Metal
$5.3
Medical/ Control
and Processing
Instruments
Engines/Turbines/
$4.4
Veneer, Plywood,
$5.3
Power
Engineered Wood
Transmission
Products
Equipment
Iron/Steel/Ferroall
$4.2
Aluminum
$4.9
oy
Plastics Products
$3.6
Basic Chemicals
$4.6
Fabricated Metal
$3.6
Resin, Synthetic
$4.5
Rubber, artificial
fibers
Aerospace
$3.5
Plastics Products
$4.4
Products /Parts
All Other
$80.4
All other
$76.9
Total
$187.8
Total
$255.9
Source: U.S. International Trade Commission (Figures are NAIC-4, Total Exports and General
Imports)
Canada ranked last among the Group of 7 leading industrial countries in the
importance of services trade to its economy with trade in services making up only
12.4% of exports and 15.8% of imports in 2002. Commercial services to business
made up the largest share of Canadian service imports in 2003 led by insurance,
management and miscellaneous business services. Canada’s other large service
imports were communications, construction, and insurance services in 2003.
Although the tourism industry in Canada was hurt by the SARS epidemic and the
beginning of the Canadian dollar’s appreciation in 2003, tourism is still a large
component of bilateral services trade. U.S. travelers accounted for 60% of worldwide
travel expenditures to Canada in 2003; Canadian tourists spent 57% of their tourist
dollars in the United States.

---

CRS-9
Investment
The U.S.-Canada economic relationship is characterized by substantial
investment in each nation by investors of the other. The United States is the largest
single investor in Canada with a stock of $192.5 billion in 2003, a figure that has
nearly doubled from $97 billion in 1997. This figure represents 10.8% of U.S. direct
investment abroad (DIA), and U.S. investors accounted for 65% of inbound foreign
direct investment (FDI) in Canada in 2004.12 Finance and insurance, manufacturing,
and mining/energy are the three largest categories of U.S. FDI in Canada. Canada
has a prominent (though not the largest) FDI position in the United States at $105
billion, 7.6% of the total FDI stock in the United States. The United States is the
most prominent destination for Canadian investment abroad, capturing 44% of
Canadian direct investment abroad (DIA) in 2004.
Canada is also highly dependent on FDI. In 2003, FDI represented 32.0% of
Canada’s GDP, and Canadian DIA represented 35.0% of GDP, both figures up from
about 20.0% in 1995. However,
Figure 1. FDI Flows 1997-2003
other trends are more ominous for
billions, US$
the Canadian investment picture.
30
27.3
Canada’s share of North American
26.4
25
and global FDI has dropped in the
22.8
last decade. Canada’s share of
20
16.9
16.8
16
North American FDI has dropped
13.8
15
from 17.0% to 13.0%, while the
11.5
9.2
9.1
U.S. share has increased to 78.0%
10 8.4
7.6
7.8
from 76.0%. Also, the Canadian
5
3
share of inward global investment
0
stock has fallen from 7.7% in 1980
1997
1998
1999
2000
2001
2002
2003 to 3.0% in 2002. Flows of FDI
have slowed for both nations since
FDI: Can to US
2000. This falloff has been
FDI US to Can
attributed to such factors as the
Source: U.S. Bureau of Economic Analysis (BEA)
piercing of the technology boom,
the early 2000s recession, and investment opportunities in China.
Canadian FDI Policy. 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. Although Canada is generally open to foreign investment,
certain restrictions do exist on some forms of FDI. Investment is monitored and
some types of FDI are reviewed. “Significant investments in Canada by non-
Canadians” are reviewed under the Investment Canada Act to insure “net benefit”
to Canada. The review threshold for parties to the World Trade Organization
(WTO), including the United States, is $223 million. All transactions involving
12 Statistics Canada, The Daily, May 17, 2005
([http://www.statcan.ca/Daily/English/050517/d050517a.htm])

---

CRS-10
uranium production, financial services, transportation services, or cultural business13
must be reviewed. Net benefit is assessed on such factors as: effect on level of
economic activity in Canada including employment; the degree or significance of
participation by Canadians; the effect of productivity and technological development;
the effect on competition; the effect
on Canadian competitiveness on
Figure 2. FDI Stock 1997-2003
world markets; and compatibility
billion, US$
with national, industrial, or cultural
200
192
policies. No investment by a non-
170
resident has been rejected under this
153
150
authority, but in some instances
132
120
114
investments have been altered
105
97
98
100
91
92
96
pursuant to Investment Canada
73
guidance.14
65
50
The Canadian government has
recently introduced legislation to
0
provide for a review of foreign
1997
1998
1999
2000
2001
2002
2003
investment for national security
US in Can
Can in US
concerns. Under the legislation (Bill
Source: BEA
C-59, which received first reading on
Figure 3. Inward FDI Flows from
June 20, 2005), any direct or indirect
All Countries: 1997-2003
investment can be subject to additional
billions, US$
review under the Investment Canada
350
321.3
Act if it could be “injurious to national
289.4
300
security,” although that phrase is not
further defined. An investment found to
250
be “injurious” could be blocked or
200
179
167
conditions could be placed on the
150
transaction. Critics claim that the bill
105.6
100
72.4
would introduce uncertainty into the
66.1
39.9
50
27.5
investment process, at a time when
22.7
24.8
20.9
11.5
6.3
investment in Canada is declining.15
0
1997
1998
1999
2000
2001
2002
2003
Others warn that diversion of resources
through increased FDI such as Chinese
United States
Canada
investment in the oil sands could have
Source: Economist Intelligence Unit
political implications for U.S.-Canadian
relations.
13 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.
14 C.D. Howe Institute, “A Capital Story: Exploding the Myths of Around Foreign
Investment in Canada,” p. 21.
15 “Bill C-59: Foreign Investment Will Become Unpredictable and Politicized if Ottawa
Caves into Vague National Security Concerns,” National Post, July 19, 2005.

---

CRS-11
Disputes

Both the United States and Canada are considered to have relatively open and
transparent trading regimes. Both are signatories to the World Trade Organization
(WTO) and are bound together by the North American Free Trade Agreement.
However, irritants in the relationship do exist and each party has issues with the way
the other conducts the bilateral trade relationship. Some disputes have been
adjudicated by WTO and NAFTA dispute settlement procedures and others have
been the subject of regulatory actions by the United States or Canada.
Softwood Lumber. Perhaps the most intractable trade dispute between the
United States and Canada involves softwood lumber. The present incarnation of the
dispute began when the Softwood Lumber Agreement (SLA) between the United
States and Canada expired on April 1, 2001. This agreement, implemented in 1996,
set a tariff rate quota on exports of softwood lumber to the United States from four
Canadian provinces at 14.7 billion board feet per year and set fees for exports in
excess of that amount. U.S. lumber producers contend that Canadian provinces
subsidize their lumber industry by charging less than market value for lumber
harvested in the form of stumpage fees and other practices. U.S. timber and
environmental groups have also expressed concern about Canadian forestry
management and clear-cutting practices and allege that such practices lead to
dumping. The Canadian government has rejected these allegations and has
demanded free trade in lumber. It has asserted that Canadian mills have modernized
and are more efficient than U.S. operations.
The regulatory track of the dispute commenced on April 2, 2001, when U.S.
lumber producers filed countervailing duty and antidumping petitions with the
International Trade Commission (ITC) and the Department of Commerce
(Commerce).16 In its final determination, Commerce found that Canadian federal and
provincial timber programs represented a countervailable subsidy of 18.79% (later
reduced to 13.23% in January 2004, to 7.82% in July 2004 and to 1.2% in July 2005).
Commerce also found that Canadian producers engaged in dumping of lumber and
levied margins on companies ranging from 2.18% to 12.44% with the “all-other” rate
set at 8.43%. Canada’s Atlantic provinces have been exempted from these duties as
timber stands in those provinces are generally privately held, but all types of lumber
face duties in the remaining provinces including some products in which there is no
comparable production in the United States. The ITC determined in May 2002 that
the subsidies and dumping pose a threat of material injury to U.S. firms, thus
allowing antidumping and countervailing duties to be imposed.
Canada has challenged each of the U.S. antidumping, countervailing duty, and
threat of injury determinations before dispute settlement panels at the World Trade
Organization (WTO) and before North American Free Trade Agreement (NAFTA)
binational panels with mixed results. Binational NAFTA panels determine whether
the Commerce and ITC determinations are consistent with U.S. law, while WTO
16 For detailed account of the extensive litigation undertaken concerning the softwood
lumber dispute, please see CRS Issue Brief IB10081, Lumber Imports from Canada: Issues
and Events, by Ross Gorte and Jeanne Grimmett.

---

CRS-12
Dispute Settlement considers the consistency of these determinations with WTO
Agreements.
Subsidies. On Commerce’s subsidy determination, the WTO Appellate Body
has found that the U.S. determination that Canadian provincial stumpage fees
provided a countervailable subsidy to Canadian loggers was consistent with WTO
Agreements. It also upheld the cross-border comparison of prices to determine
subsidization under certain circumstances, but remanded to Commerce to determine
if certain sales represent “pass-through” subsidies. A compliance panel report of
August 2005 found that Commerce has failed to conduct this analysis. In response
to the earlier WTO decision, Commerce recalculated the subsidy slightly lower to
18.62% from 18.79%.
The NAFTA binational panel has affirmed that Commerce’s determination that
provincial stumpage programs are a countervailable subsidy are consistent with U.S.
law. However, it found cross-border market comparisons and other provisions of the
determination contrary to U.S. statutes. The NAFTA panel has remanded the
inconsistent portions to Commerce for adjustment of the subsidy rates, and several
remand decisions by Commerce have lowered the countervailable subsidy rate from
18.79% to 1.88%.
Dumping. The WTO Appellate Body has broadly upheld U.S. imposition of
antidumping duties as consistent with U.S. WTO obligations. However, it faulted the
methodology known as “zeroing”17 in calculating the duties, and remanded the
determination for recalculation. Commerce did recalculate with another
methodology, which resulted in increased duties. Antidumping duties vary based on
the producer, and specific rates now range from 3.93% to 16.35%, with an “all-other”
rate set at 11.54%.
A binational NAFTA panel has affirmed U.S. imposition of antidumping duties
as consistent with U.S. law, but the panel found certain calculations of dumping
margins such as “zeroing” as inconsistent with U.S. law. Two rounds of remands
have lowered duties on certain producers and have revised the “all-other” duty to
8.85%, however the third remand raised this latter rate to 10.52%.
Injury Determination. Under U.S. trade remedy law, an affirmative
determination of subsidy or dumping must be coupled with a determination from the
ITC that the domestic industry faces a threat of material injury. Unless this
determination is made, AD or CVD duties cannot be imposed. Canada has
challenged these affirmative decisions before the WTO and NAFTA.
A WTO dispute settlement panel found that the ITC threat determination was
inconsistent with WTO obligations in February 2004. After the ITC reaffirmed its
injury determination in November 2004, Canada requested a compliance panel to
17 Broadly speaking, zeroing is a methodology to determine dumping margins under which
exports shipped at prices above the calculated normal rate (i.e. not dumped) are given a zero
value, rather than averaged with exports shipped at rates below normal prices in the
calculation of dumping duties. This has the effect of increasing dumping margins.

---

CRS-13
review this decision, and the panel reportedly released an interim decision on August
29, 2005 upholding the U.S. determination.
In August 2003, a NAFTA panel determined that the ITC’s determination that
softwood lumber imports constituted a threat of material injury to producers was
inconsistent with U.S. law and remanded that decision to the ITC for further analysis.
On two remands from the binational panel, the ITC reaffirmed its determination of
material injury. On August 31, 2004, the NAFTA panel determined the evidence
provided by ITC was not sufficient to find material injury and ordered the ITC to
make a final determination invalidating its material injury determination, which the
ITC did in September 2004. The United States appealed this determination to the
NAFTA Extraordinary Challenge Committee (ECC) in November 2004, and a
decision was rendered on August 10, 2005. The ECC upheld the findings of the
NAFTA panel.
The U. S. position is that the duties can continue under the above-mentioned
November 2004 injury determination and that the previous determination challenged
by Canada is no longer in effect. However, Canada has emphasized the primacy of
the NAFTA panel’s decision and expects the duties to be withdrawn and refunded.
It is also challenging the implementation of the November 2004 determination in the
U.S. Court of International Trade. The Canadian government and press have
expressed strong disapproval at the U.S. decision, and some have called for
retaliation against the United States. U.S. Ambassador to Canada, David Wilkins,
has urged Canada to resume negotiations on a final settlement to the dispute.18 On
September 13, 2005, the Coalition of Fair Lumber Imports, a U.S. producer group,
filed a case before the U.S. Court of Appeals in Washington D.C. challenging the
constitutionality of the NAFTA Chapter 19 dispute settlement process.
Figure 4. U.S. Trade Deficit with Canada
20
13
14 13.5 13.9 15.4
9.5
6.1
5
3.5 4.6
5.3 6.3
7.4
8.3 5.6 6.3
0
-6
-9.9 -8.4
-8.3 -10.7-14.7
-20
-19.1
-17.9-20.7
-23.9
-34.4
-40
-49.8
-52.8-53.2
-54.7
-60
-68.2
-80
1989
1995
2000
2004
Trade Balance ($)
trade deficit/% total trade
Source: U.S. International Trade Commission
18 “Wilkins Insists New Lumber Talks Needed,” National Post, August 18, 2005.

---

CRS-14
Efforts to resolve the dispute through negotiations have take place between the
United States, Canada, and the affected provinces: Alberta, British Columbia,
Ontario, and Quebec. These proposals generally have revolved around the
imposition of a quota based on market share and an over-quota export tax levied by
the Canadian government to replace the antidumping and countervailing duties.
Following the U.S. response to the NAFTA ECC decision, Canada cancelled
negotiations scheduled for August 22, 2005.
Byrd Amendment. The disposition of the softwood lumber duties already
collected has become another impediment to the resolution of the lumber dispute, and
they have become embroiled in a separate dispute over the Continued Dumping and
Subsidy Offset Act of 2000 (CDSOA, known as the Byrd amendment).19 Under the
Byrd Amendment, anti-dumping and countervailing duties are disbursed to the
industries filing the actions, rather than the Treasury. Canada was among the
countries that successfully challenged the CDSOA at the WTO. Canada began
imposing $14 million in retaliatory duties, authorized by the WTO, in the form of a
15 percent surtax on imports of U.S. live swine, ornamental fish, oysters, certain
cigarettes, and certain fish items on May 1, 2005. On another legal front, Canada is
seeking to prevent the lumber duties from being distributed under the CDSOA in a
suit filed with the U.S. Court of International Trade on April 29, 2005.
Beef. On May 20, 2003, a case of bovine spongiform encephalopathy (BSE)
or ‘mad-cow’ disease was detected on an Alberta farm, which was quickly
quarantined. Concerns about the food supply caused the United States, Mexico,
Japan, and others to close their borders to Canadian live animals and beef products.
On August 8, 2003, the U.S. announced that it would begin to phase out the ban for
boneless sheep and lamb meat, and for boneless meat from cattle under 30-months.
Mexico announced a similar phase-out on August 11, 2003.
The process for reopening the border to live animals began with a USDA
rulemaking proceeding initiated in November 2003. During a visit to Canada in
December 2004, President Bush reportedly assured Prime Minister Paul Martin that
the border would be reopened to Canadian live cattle. The USDA published a final
rule on January 4, 2005 that allows for importation of ruminants from minimal-risk
regions. Canada’s regulatory system has been deemed to qualify for minimal-risk
designation for live cattle and bison under 30 months of age and sheep and goats
under 12 months. This rule was challenged in U.S. District Court by the Ranchers-
Cattleman Action Legal Fund (R-CALF) and a preliminary injunction preventing the
implementation of the final rule was granted on March 2, 2005. The 9th Circuit
Court of Appeals overturned this ban on July 14, 2005. On July 18, 2005, the first
live cattle were shipped across the border from Ontario to New York state.20
While the lifting of the ban disappointed U.S. rancher groups such as R-CALF,
other American agriculture organizations were pleased with the ruling. Processors,
19 For background on the Byrd Amendment, please refer to CRS Report RL33045, The
Continued Dumping and Subsidy Offset Act (“Byrd Amendment”), by Jeanne J. Grimmett
and Vivian C. Jones.
20 Congress Daily, July 19, 2005.

---

CRS-15
who had been facing losses as more processing facilities were established in Canada,
supported the ruling as other cattlemen saw this measure as leverage to reopen the
Japanese and other markets which have been closed to American farmers since the
discovery of a BSE case in Washington state. Export Development Canada estimated
that the total cost of the ban to the Canadian economy about $6 billion.21
Intellectual Property Rights (IPR). As in previous years, the U.S.Trade
Representative placed Canada on its Special 301 watch list for intellectual property
rights protections in 2005.22 The watch list, the mildest category of rebuke, indicates
that the listed trading partner “merit[s] bilateral attention to address IPR problems.”
The United States urged Canada to implement the World Intellectual Property
Organization’s Copyright treaty23, which has been signed but not ratified. It expressed
concern that a Canadian court declared that those using peer-to-peer software to
download digital media did not infringe on copyrights and on proposed legislation
on technological protection measures and Internet service provider liability. The
United States also expressed concern about trade in pirated and counterfeit goods in
Canada, as well as the transhipment and transiting of such goods. The United States
urged Canada to adopt tougher border security measures to crack down on this trade,
including allowing for the seizure of pirated and counterfeit goods. USTR is
conducting an out-of-cycle review of Canada during 2005 to monitor Canada’s
progress on these issues.
In May 2004, the Canadian Parliament enacted the Jean Chretien Pledge to
Africa Act (Bill C-9). This legislation was designed to implement the WTO’s 2003
Decision on the provision of lower cost medicines to address public health problems
in developing countries. This legislation authorizes the Canadian government to
authorize the manufacture of a generic drug by compulsory license for distribution
to a developing country with insufficient or no manufacturing capability. Draft
regulations implementing the legislation were published in November 2004, but a
technical flaw in the Act required that Parliament reapprove it, which it did on May
5, 2005, and the regulatory process is still not completed. Critics claim that the bill
contains too many restrictions, including a right of first refusal to patent holders to
produce the drug, and lack of incentives for generics to produce the medications.24
While the United States has not expressed an opinion on this legislation, it had
sought to restrict the scope of the WTO decision during its negotiation.
Wheat. On October 23, 2002, the U.S. Commerce Department announced
antidumping(AD) and countervailing duty (CVD) investigations on Canadian durum
21 EDC Weekly Commentary, “Mad Cow Roundup,” August 3, 2005.
[http://www.edc.ca/docs/ereports/commentary/weekly_commentary_e_7574.htm]
22 United States Trade Representative, 2005 Special 301 Report,
[http://www.ustr.gov/Document_Library/Reports_Publications/2005/2005_Special_301/
Section_Index.html]
23 The WIPO Copyright Right treaty updates existing copyright protections for Internet and
other electronic media.
24 “Chretien’s Plan to Deliver Cheap Medicines for Africa Stuck in Uncertainty,” Canadian
Press, May 1, 2005; “Canadian Triumph Turns Sour,” Toronto Star, May 9, 2005.

---

CRS-16
and hard-red spring wheat. U.S. petitioners allege that the Canadian Wheat Board
(CWB), a state trading enterprise which markets grain produced by western Canadian
farmers, subsidizes Canadian growers through loan guarantees and limits
transportation costs by subsidizing railcars. These subsidies, U.S. producers contend,
encourage dumping of Canadian wheat into the U.S. market at below-market prices.
The Canadian government maintains that the practices of the CWB are fully
compliant with the WTO and bilateral trade obligations, and it points to several U.S.
investigations that it claims uphold their position. On August 28, 2003, the
Department of Commerce’s final determination found countervailable subsidies
equivalent to 5.29% of the price of both durum and hard-red spring wheat. Final
antidumping margins were determined to be 8.26% for durum and 8.87% for hard-
red spring. On October 9, 2003, however, the ITC found that the alleged subsidies
and dumping margins did not cause material injury or a threat of material injury on
U.S. durum wheat producers. For Commerce’s final dumping and countervailing
duties to take effect, the ITC must make an affirmative determination of material
injury or threat of material injury to domestic producers. The ITC did find material
injury with regard to domestic hard-red spring wheat on October 3, 2003, thus
allowing antidumping and countervailing duties of 14.15% to take effect on this
product.
NAFTA panels were established in 2004 at Canada’s request to examine the
ITC final determination and Commerce’s antidumping and subsidy determinations.
In March 2005, one NAFTA panel remanded Commerce’s determination on
financial guarantee programs, while upholding Commerce’s subsidy finding
regarding provision of government railcars. Commerce recalculated its subsidy
determination and lowered the subsidy rate from 5.29% to 2.54% (providing a
combined AD/CVD rate of 11.4%). On June 7, 2005, another NAFTA panel
determined that the ITC had failed to prove that material injury resulted from the
importation of hard-red spring wheat.
Meanwhile, the United States challenged practices of the CWB at the WTO. On
July 11, 2003, the United States secured the establishment of a World Trade
Organization dispute settlement panel to examine the consistency of CWB activities
with WTO rules. On February 10, 2004, the WTO panel found that, while the CWB
did not violate the WTO provisions concerning state-trading enterprises, certain
CWB practices did violate national treatment obligations25 of the WTO. The United
States announced on June 1, 2004 that it would appeal the panel decision. On August
30, 2004, the WTO Appellate Body upheld the panel’s conclusion that the United
States failed to prove its claim that the CWB sells its wheat under non-commercial
terms.
Culture. Canada has long been concerned that its culture is in danger of being
overwhelmed by that of the United States, which, in terms of population and GDP,
is about ten times the size of Canada. Claiming a need to maintain its cultural
identity, Canada has implemented regulations to promote Canadian ownership of
film distribution; to encourage Canadian content in radio/TV programming; and to
25 National treatment refers to the WTO obligation to treat goods from other countries in
a like manner to domestically produced goods.

---

CRS-17
restrict the distribution of foreign magazines. The United States has challenged many
of these restrictions, arguing that such laws are disguised protection that denies
opportunities to U.S. firms. Canada had its cultural industries exempted from
NAFTA, subject to extra U.S. retaliatory rights, and has resisted attempts to include
cultural industries in WTO negotiations.
Security and Trade
The aftermath of the terrorist attacks on the United States on September 11,
2001 has increased scrutiny of the Canadian border as a possible point of entry for
terrorists or for weapons of mass destruction. The potential for economic disruption
caused by a terrorist attack on border infrastructure or as a result of a border closure
is large. For example, the Ambassador Bridge that links Detroit and Windsor,
Ontario is the largest trade link in the world, with more than 7,000 trucks crossing
daily carrying goods worth more than $120 billion per year.
The cost of the border to carriers, manufacturers and governments in terms of
delays and compliance has been estimated by one survey at $7.5 billion to $13.2
billion annually.26 Using the survey’s midpoint estimate, they estimate that costs
related to transit time and uncertainty total $4 billion and trade policy related costs
were estimated at $6.28 billion.27 The total midrange figure, $10.3 billion, reflects
2.3% of cross-border trade in 2004. Another report claims that average processing
times have increased 200% from 45 seconds in December 2001 to 2.15 minutes in
December 2004. This report also claims that additional reporting, compliance, and
delays add approximately $800 to the cost of every North American produced vehicle
and that the border “threatens to become the greatest non-tariff barrier the world has
ever seen.”28
Action Programs and Initiatives. In order to address what became a
threat of border disruptions, the two governments agreed on December 12, 2001 to
a (now) 32-point Smart Border Action Plan consisting of 4 pillars: the secure flow
of people, the secure flow of goods, a secure infrastructure, and coordinated
enforcement and information sharing. The pillar concerned with the flow of goods
consists of initiatives on harmonized commercial processing, clearance away from
the border, joint or shared customs facilities, enhancement of information sharing,
container targeting at seaports, and infrastructure improvements. This initiative was
updated in the NAFTA context by the Security and Prosperity Partnership of North
America (SPP). The SPP was launched at a summit of the leaders of the three
countries at Crawford, Texas on March 24-25, 2005. The first semi-annual report was
26 George Jackson, Douglas Robideaux, and John Taylor, “The U.S.-Canada Border: Cost
Impacts, Causes, and Short to Long Term Management Options.”
(www.fhwa.dot.gov/uscanada/ studies/taylor/costrpt_2003.pdf)
27 Ibid.
28 Coalition for Secure and Trade-Efficient Borders, “Rethinking Our Borders: A New
North American Partnership,” July 2005,
([http://www.cme-mec.ca/pdf/Coalition_Report0705_Final.pdf])

---

CRS-18
released on June 27, 2005. The initial harvest of security results included border
improvements, land preclearance measures, and joint port security exercises, many
of which are follow-on to the 32-point Action Plan.29
The Free and Secure Trade (FAST) is a joint program implementing the
harmonized commercial processing initiative. It is open to participants in the U.S.
Bureau of Customs and Border Protection’s (CBP) Customs-Trade Partnership
Against Terrorism (C-TPAT) and the Canadian Border Security Agency’s Partners
in Protection Program. Participants of these programs undertake audit-based
compliance measures to enhance security along the supply chain and receive
certification as low-risk shippers. In February 2004, CBP reported approximately
2,800 companies were certified. The FAST program provides for dedicated
inspection lanes to goods carried by approved lower-risk shippers, to goods
purchased from pre-authorized importers, and to goods transported by pre-authorized
drivers and carriers. FAST transit points are operational at 19 high-volume land
ports of entry on the northern border.30 In August 2005, CBP reported that 55,427
drivers enrolled in the program.
A complementary program to expedite the secure movement of people has also
been established. The NEXUS program provides an identification card and dedicated
traffic lanes to frequent travelers who have undergone security clearances on both
sides of the border. The NEXUS is seen as especially important to minimize the
disruption of cross-border trade in services, which relies on the free movement of
skilled labor. NEXUS was operational in 11 high-volume border crossings and is
utilized by 71,000 participants in December 2004.31 A pilot program for an airport-
based NEXUS program began in November 2004 at Vancouver International Airport
using iris recognition biometric technology.
The 32-point action plan also called for increased monitoring and targeting of
containers off-loaded at Canadian and U.S. ports in transit to the other nation. The
U.S. Container Security Initiative (CSI) is designed to prescreen high risk containers
entering the United States at overseas ports of departure. The program is working to
develop security criteria to identify high risk cargo, to develop and utilize technology
to pre-screen high risk containers and to encourage the use of secure containers. U.S.
customs agents work alongside Canadian agents in the CSI ports of Halifax,
Montreal, and Vancouver to identify cargo for screening. Canadian customs agents
are stationed in the ports of Newark and Seattle-Tacoma. These agents have no
enforcement power on the other country’s territory; they serve in an advisory
capacity.
The Canadian government has implemented a package of port security
initiatives that included increased screening of marine traffic, “real-time”
29 “NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
May 13, 2005.
30 Smart Border Action Plan Status Report, December 17, 2004.
[http://www.dfait-maeci.gc.ca/can-am/washington/border/status-en.asp]
31 Ibid.

---

CRS-19
identification and monitoring of vessels in Canadian waters, radiation screening
equipment for containers, and enhancements to portside Emergency Response Teams
of the Royal Canadian Mounted Police. These initiatives respond to concerns within
Canada that differences in port security were affecting the ability of Canadian ports
to compete as entry points for goods eventually entering the U.S. market. The United
States and Canada have also reached agreement on a program of increased screening
and monitoring of railway shipments between the two countries. Under this program,
railcar cargo detection equipment known as the Vehicle and Cargo Inspection System
(VACIS) has been installed at seven rail crossings in the United States and one in
Canada.
Land preclearance away from the border by U.S. and Canadian customs agents
working in each other’s territory remains a contentious issue. Although a jointly
commissioned study has detailed the operational benefits of cross-border operations,
several legal and institutional issues remain unresolved including land ownership,
the enforcement powers of such agents, and their ability to carry firearms. This issue
may also be complicated because of Canadian sensitivities about sovereignty. One
pilot program to build joint border stations for small land border crossings sidesteps
this question, however, as structures actually straddle the border at six small
crossings. The SPP update announced a new preclearance site at the Thousand
Islands crossing where Canadian operations would be relocated to Alexandria Bay,
New York.
A related issue is the ability of the transportation infrastructure to cope with
increased security measures. The aging condition and limited capacity of the land
border infrastructure preceded the terrorist attacks on September 11, 2001. The
Ambassador Bridge and the Detroit-Windsor Tunnel, which together carry 25% of
total U.S.-Canada cross-border traffic, both opened in 1930. The Peace Bridge
linking Buffalo NY and Niagara, Ontario was opened in 1927 and is 3 lanes wide.
Approaches to the bridges, often city streets, have been criticized as inadequate to the
commercial needs of the 21st century. This issue, in turn, affects the efficient
implementation of security measures. For example, the FAST system provides for
dedicated lanes at land border ports for expedited preclearance. However, these lanes
will not provide a time saving if the FAST participant cannot access this lane due to
congestion or delays at the points of access. The SPP program has targeted
improvements on the Detroit/Windsor crossing to commence in the fall of 2005. The
Surface Transportation Reauthorization Act (P.L. 109-59), signed by the President
on August 10, 2005, reauthorized a coordinated border infrastructure program which
funds border projects that facilitate cross-border vehicle and cargo movements (Sec
1303).
Prospects and Policy Options
Economic Integration. The terrorist attack of September 11, and its
aftermath, have sparked a wide-ranging debate in Canada over its relationship with
the United States, including the feasibility or desirability of furthering the process of
North American integration. The extent to which the two economies are integrated
was dramatized by the adverse impact that border closings had on trade flows after

---

CRS-20
the terrorist attacks. While concerns in the United States over the U.S.-Canada
border are focused primarily on border security and immigration issues, the debate
in Canada has become much broader, encompassing such issues as the nature of
sovereignty, the desirability and feasibility of further economic integration with the
United States, and even the adoption of the U.S. dollar. This discourse is not unusual
in Canada; questions concerning relations with the United States continually loom
large in policy discussions. Such discussions are unusual in the United States, and at
this point they are generally confined to the types of security measures described in
the preceding section.
Certain aspects of increased cooperation with the United States on border and
immigration issues have proved controversial to some Canadians. These questions
generally have taken the form of resistance in some quarters to the notion of
harmonization of U.S. and Canadian regulations. A segment of Canadian public
opinion fears that, due to the wide disparity in population and economic power of the
two nations, harmonization of customs and immigration regulations would
inevitably lead to adoption of U.S. standards, and implicitly, the policies behind
them. Moreover, according to this view, Canadian resistance to this harmonization
could imperil the economic relationship with the United States. However, others
contend that Canadian and U.S. regulations affecting the border are more similar than
different and would be for the most part compatible. Hence, the scope of
coordination in certain areas of border management may be acceptably encompassed
by mutual recognition of each other’s regulations.
Others in Canada believe the lesson from September 11 is that increased
cooperation with the United States is both necessary and inevitable, given the reality
of Canadian trade flows and economic interdependence. Yet, they believe such
integration must be managed to assure Canada protects its interests and its
sovereignty. Several economic options have received renewed attention in Canadian
policy circles, from greater regulatory harmonization to more long-term options
including a security perimeter, a customs union, a common market, or a monetary
union. The latter also received attention due to the long-term slide of the Canadian
dollar up to 2002. However, the appreciation of the Canadian currency by 30%
against the U.S. dollar since has eclipsed such discussions. These concepts are not
new, and they have been discussed in conjunction with “deepening” the North
American Free Trade Agreement. Consequently, these discussions often involve
Mexico as well.
NAFTA Plus. With the tenth anniversary of NAFTA in 2004 (and the 15th
anniversary of FTA), there has been renewed discussion of ways to enhance
cooperation between the three NAFTA partners. The concept of deepening NAFTA-
“NAFTA plus”- has taken on added salience, in some quarters, since most of the
gains resulting from tariff reduction of the agreement have been realized. In addition,
FTAs negotiated by the United States and Canada with other trading partners have
diminished the relative advantage of NAFTA. In addition, since the 2001 terror
attacks there has been a perception by some in Canada and Mexico that continued
economic access to the U.S. market is dependent on greater security cooperation with
the United States. Former U.S. Ambassador Paul Cellucci notably said in 2003 that

---

CRS-21
“security trumps trade” in the U.S.-Canada relationship.32 This realization has led to
many border initiatives described above. The Security and Prosperity Partnership
(SPP), contains many initiatives that could lead to some measure of regulatory
harmonization among the United States, Canada, and Mexico. In addition to calling
for implementation of common border security strategies, the SPP initiates
cooperation in energy, the transportation network, financial services, and standards
harmonization. Ten Ministerial working groups were formed and were required to
report after 90 days, and semi-annually thereafter. Reportedly, the scope of SPP
activity is in the realm of regulatory changes, actions that do not require legislative
activity.33
The first semi-annual report was released on June 27, 2005. The Prosperity
component of the SPP intends to enhance competitiveness by developing proposals
to streamline regulatory processes among the three partners, enhance detection and
prevention of counterfeiting and piracy, and liberalize rules of origin. Sectoral
initiatives on steel, autos, energy, air transport, and e-commerce are also envisioned.
Quality of life cooperative initiatives on pollution, agriculture and food supply, and
health issues were also launched. 34
Security Perimeter. One approach envisioned by some U.S. and Canadian
business leaders and policy advocates is to create a North American security
perimeter. This proposal responds to U.S. fears of terrorism by removing the security
functions from the border to the point of first contact of a good or person to North
America. Thus, the container landing at the Canadian port of Halifax headed for the
United States would be inspected in Halifax, not at the U.S. border, thereby avoiding
delays at border choke-points. Pre-screening of passengers would also take place at
the point of landing, not at the border. However, a completely seamless border for
goods would also require standards harmonization or acceptance of the inspecting
party’s standards, information sharing on threat assessments, and trust in each party’s
screening procedures. It also makes the assumption that there are no terrorist threats
indigenous to the North American security perimeter.
Customs Union. Another step discussed in policy circles regarding the
further integration of the North American economy is the creation of a customs
union. Members of a customs union commonly eliminate tariffs among themselves,
and erect common barriers against the rest of the world. Both the U.S. and Canada
have already eliminated all tariffs between each other under NAFTA, and have
similar, though not identical, tariff schedules with third countries. Because all
customs duties would be paid at port of entry at the perimeter of the customs union,
the need for customs agents on the U.S.-Canadian land border to collect revenue
would be obviated. However, border agents also enforce immigration, sanitary and
phytosanitary, and environmental laws. A customs union does not imply a
32 “Cellucci’s Message,” National Post, March 26, 2003.
33 “NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
May 13, 2005.
34 Security and Prosperity Partnership of North America, Report to Leaders, June 2005,
[http://www.spp.gov/spp/report_to_leaders/index.asp?dName=report_to_leaders]

---

CRS-22
harmonization or mutual recognition of each nation’s regulations. Thus, a national
presence at the border would continue to be necessary. It is also unclear in what form
current trade remedy practices could be continued under a customs union. Such
actions against third countries could continue relatively easily if both sides found it
necessary; however, actions against each other would require the continued payment
of duties at the border.
Common Market or Economic Union. Deeper integration of the North
American economic space would imply some form of common market or economic
union. A common market area would add free movement of labor and capital; thus,
immigration and investment regulations would need to be harmonized or mutually
recognized. In addition to a common tariff policy and free trade in goods and
services, a common market would imply free movement of capital and labor. At this
point, harmonization of certain investment and immigration issues would need to be
agreed upon. A type of economic union approaching that of the European Union
would also require harmonized or mutually recognized standards and regulations and
perhaps some supranational institutions. Although the United States and Canada
share many developed country level standards, this form of integration would still
need to be meticulously worked out. For example, would the United States adopt the
metric system to fulfill its obligations to harmonize standards? Could the two nations
adopt common forestry prices and management policies and thereby help resolve the
softwood lumber dispute? Would either nation allow supranational entities to
overrule laws passed by Congress or Parliament? These questions illustrate the extent
to which North American economic integration would affect the governance of the
United States, Canada, and possibly Mexico.
Monetary Union. Another discussion recurrent in many Canadian policy
circles is that of monetary union with the United States. This potential goal has been
discussed in many forms. The Canadian dollar could be linked in value to the U.S.
dollar; Canada could adopt the U.S. dollar; or a new North American currency (called
the Amero by one proponent) could replace the U.S. and Canadian dollars, and
perhaps the Mexican peso. Generally, talk of monetary union north of the border is
strongest during times of relative weakness of the loonie vis-a-vis the U.S. dollar.
The recent strength of the loonie has diminished such discussion, although the idea
still has some proponents.
Those who support monetary union argue that it would force Canada to make
the necessary structural adjustments that would make it more competitive with the
United States. In other words, dollarization or a currency union would remove the
ability to cushion adverse economic conditions through depreciation of the currency.
By tying the loonie to the U.S. dollar or by adopting the dollar outright, Canada
would be making the unmistakable commitment to converge with U.S.
macroeconomic policy. Then Canada would be able to reap the benefits of U.S.
policy, which traditionally have been lower inflation, lower interest rates, and higher
levels of growth than Canada has experienced. In addition, the savings in trade
transaction costs would be significant for the volume of trade the two nations
conduct.
Canadian opponents of monetary union contend that it would lead to an
unacceptable loss of political and economic sovereignty. Monetary policy would be

---

CRS-23
dependent on (or tied to) actions of the U.S. Federal Reserve. Thus, the Canadian
government would be left with fewer levers to combat inflation or fight recession.
In a monetary union in which macroeconomic convergence is reached, this point may
not be important. To opponents of monetary union, however, the two economies
respond differently to events, and thus need to utilize different adjustment
mechanisms. Furthermore, with a population and economy smaller than some
Federal Reserve districts, Canada’s ability to influence U.S. monetary policy in a
monetary union would be small.

---