Order Code RL33087
CRS Report for Congress
Received through the CRS Web
United States-Canada Trade and Economic
Relationship: Prospects and Challenges
Updated October 13, 2006
Ian F. Fergusson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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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 $499.3
billion in 2005. 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 North American Free Trade Agreement
(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 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
2005, total merchandise trade with Canada consisted of $287.9 billion in imports and
$211.4 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, but the rate of increase declined in 2005 perhaps partly due to
the 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, an
agreement on which has recently been implemented, 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.

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Contents
The Economies of the United States and Canada . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Trade and Investment Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Autos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Trade Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Canadian FDI Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Softwood Lumber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Byrd Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Corn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Intellectual Property Rights (IPR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Wheat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Security and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Western Hemisphere Travel Initiative (WHTI) . . . . . . . . . . . . . . . . . . 19
Action Programs and Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Prospects and Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Economic Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
NAFTA Plus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Security Perimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Customs Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Common Market or Economic Union . . . . . . . . . . . . . . . . . . . . . . . . . 25
Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
List of Figures
Figure 1. U.S. Trade Deficit with Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 2. FDI Flows 1999-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. FDI Stock 1999-2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 4. Net Inward FDI Flows from All Countries: 2000-2005 . . . . . . . . . . . . 11
List of Tables
Table 1. Selected Comparative Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. U.S. Merchandise Trade With Canada, 2005 . . . . . . . . . . . . . . . . . . . . . 8

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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 U.S. economy dwarfs that of Canada. U.S. gross domestic product (GDP) is over
11 times that of Canada in nominal terms and nearly 12 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. During the 10-
year period 1996-2005, the average growth rates of the United States and Canada
have been virtually identical. However, since 2003 growth rates in the United States
have exceeded those of Canada. The persistent (and growing) per capita income gap
has proven worrisome to Canadian policymakers as it raises questions about
Canadian productivity and competitiveness (see box).
In terms of sectoral components of GDP, the United States 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% - 68%). 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
1 Purchasing power parity (PPP) is a economic theory which holds 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.

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CRS-2
(29%-20%). Agriculture makes up the remaining 2% of the Canadian economy and
1% 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 in the 1990s. 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 68.3% 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 are now effectively negative in both the United States and Canada equaling
-0.5% and -0.4%, respectively, in 2005.2
Table 1. Selected Comparative Statistics
Indicator
United States
Canada
GDP (2005)
Nominal (billion US$)
12,486
1,124
Purchasing power parity
12,486
1,057
(PPP) (billion $)
Per Capita GDP (2005)
Nominal ($)
42,125
34,880
PPP ($)
42,125
32,790
Real GDP Growth (2005)
3.5%
2.9%
Average Annual GDP
3.34%
3.33%
Growth Rate (1996-2005)
Recorded Unemployment
5.5%
6.7%
Rate (2005)
Exports (%GDP)
7.2%
32.0%
Imports (%GDP)
13.4%
27.9%
Sectoral Components of
GDP (%)
Industry
20.3%
29.4%
Services
78.5%
68.4%
Agriculture
1.2%
2.2%
Current Account Balance
-6.5%
1.7%
(% GDP)
Public Debt/GDP
37.4%
68.3%
Sources: Economist Intelligence Unit; Census Bureau; Bureau of Economic Analysis; Statistics
Canada.
2 Scotiabank Global Economic Research Report, “Spend or Save: Which Way Will the
Pendulum Swing in 2006,” February 23, 2006.

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CRS-3
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
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 U.S. states with the U.S.
government. 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 2005,
total merchandise trade with Canada was $499.3 billion (a 12.6% increase over
2004), consisting of $287.9 billion (12.5% over 2004) in imports and $211.4 billion
(12.6% over 2004) in exports.3 Trade with Canada represented nearly 19.4% of U.S.
total trade in 2005, with Canada purchasing 23.4% of U.S. exports and supplying
17.2% of total U.S. imports last year. 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 56.6% of Canada’s imports of goods in 2005, and purchased
84.0% of Canada’s merchandise exports.
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
20.7% in 2005, the comparable figure for Canada was nearly 60%. Canada’s goods
exports represent 32% of Canadian GDP and exports to the United States alone
represent 26.9% of Canadian GDP. A further 15.7% of Canadian GDP is used to
purchase U.S. goods. Canada is relatively more exposed to the world economy and
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.

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

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CRS-5
Canadian trade was intra-firm trade, reflecting the substantial integration of the two
economies and 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 21.8% of U.S. exports to
Canada and 22.7% of U.S. imports from Canada (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 2005, 2.38 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), but that advantage has diminished
with the loonie’s 30% 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 Another suggests that the rising Canadian dollar
will erase all cost-advantage to Canadian manufacturing by 2007.7
The restructuring of the North American automotive industry and the attendant
plant closures and job layoffs has also affected Canadian automotive operations.
General Motors’ November 2005 restructuring announced the closure of the St.
Catherines, Ontario, powertrain plant and an Oshawa, Ontario, assembly plant
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.
7 “Canada en route to Losing Car-Maker Advantage,” Globe and Mail, February 27, 2006.

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CRS-6
resulting in the loss of 3,660 Canadian employees.8 Ford’s restructuring announced
the closure of a shift in St. Thomas, Ontario, and a Windsor casting plant resulting
in the loss of 1,000 jobs.9 In addition, Canadian auto parts manufacturing reportedly
has lost an estimated 10,000 jobs since 2003.10 However, Toyota is expanding
operations in Canada, and the Big 3 continue to plan significant new investments to
upgrade plants.11
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 and cubic feet has also increased almost 20%. In 2005, oil and gas
displaced motor vehicles as the United States’s largest import from Canada. 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, 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 second largest trading partner, and is growing rapidly. However, most
of this increase is import-based. In 2005, Canada imported $24.4 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 $5.8 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, from the Canadian perspective, 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.12
8 “GM to Cut 3600 Jobs in Ontario,” CBC.Ca News, November 21, 2005.
9 “Ford’s Canada Cuts Limited,” The Globe and Mail, January 23, 2006
10 “Auto Sector to Pump $4.9 billion into Plants,” Ottawa Citizen, March 15, 2006.
11 “Canada en route to Losing Car-Maker Advantage,” Globe and Mail, February 27, 2006.
12 Wendy Dobson, “Taking A Giant’s Measure: Canada, NAFTA, and an Emergent China,”
(continued...)

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CRS-7
Figure 1. U.S. Trade Deficit with Canada
20
13
14 13.5 13.9 15.4 15.3
9.5
5
3.5
4.6
5.3
6.3
7.4
8.3
5.6
6.3
0
-6
-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
-76.5
-80
1990
1993
1996
1999
2002
2005
Trade Balance ($)
trade deficit/% total trade
Source: U.S. International Trade Commission
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.13
Trade Deficit. The U.S. merchandise trade deficit with Canada in 2005
increased 24.7% (12.2%) from 2003 to a record $68.2 billion ($76.5 billion). Imports
have been growing faster than exports as well. In the free trade era since 1989, the
value of imports over exports increased from 3.5% of the value of total trade in 1991
to 15.3% in 2005. The increasing trade deficit with Canada has been blamed on
many factors. Up until 2003, the persistent trade deficit was attributed, in part, to the
weakness of the Canadian dollar. The loonie had steadily depreciated in value in the
decade prior to 2003. Worth approximately $0.84 at the time of the U.S.-Canada Free
Trade Agreement in 1989, the currency briefly sank to $0.63 in 2002. The loonie
12 (...continued)
C.D. Howe Institute, September 2004.
13 “Canada Welcomes China’s Cash - Hospitality Toward Investments Run Counter to Mood
in U.S.,” Wall Street Journal, July 15, 2005.

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CRS-8
bounced back to an average of $0.71 in 2003, $0.75 in 2004, and $0.825 in 2005.
(The loonie broke through to $0.91 in June 2006, a 28-year high, but has since fallen
back to around $0.88 in October 2006.) In 2005, at least, the depreciating U.S. dollar
— which should make cheaper U.S. goods more attractive on the Canadian market
— did not have an ameliorative effect on the U.S.-Canadian trade deficit. However,
increased prices for natural resources and energy, attributed to the global expansion
and Chinese development, may be a factor for both the loonie’s strength and the
persistent U.S. trade deficit in 2005 with Canada.
Table 2. U.S. Merchandise Trade With Canada, 2005
Amount
Amount
Export Category
Import Category
(billion$)
(billion$)
Motor parts
$25.9
Oil and Gas
$53.1
Motor Vehicles
$20.2
Motor Vehicles
$47.1
Computer Equipment
$8.4
Vehicle Parts
$18.0
Special Classification
$7.3
Pulp, Paper, Paperboard
$10.5
Semiconductors
$6.4
Returned/Reimported
$9.8
Agriculture/Construction
$6.5
Petroleum and Coal
$9.4
Machinery
Products
Machinery
$6.3
Special Classification
$8.0
Chemicals
$5.8
Aerospace Products and
$7.5
Parts
Materials/
$5.8
Sawmill and Wood
$7.4
Resins/synthetic fibers
Products
Iron/Steel/Ferroalloy
$5.6
Aluminum
$5.8
Engines/Turbines/ Power
$5.3
Nonferrous Metal and
$5.7
Transmission Equipment
Processing
Electrical/
$4.8
Basic Chemicals
$5.6
Medical/Control
Instruments
Aerospace Products/Parts
$4.6
Resin, Synthetic Rubber,
$5.4
artificial fibers
Plastics Products
$4.1
Veneer, Plywood,
$5.2
Engineered Wood
Products
Fabricated Metal
$4.1
Plastics Products
$4.9
All Other
$90.2
All other
$84.5
Total
$211.4
Total
$287.9
Source: U.S. International Trade Commission. (Figures are NAIC-4, Total Exports and General
Imports.)

---

CRS-9
Services. The United States also conducts a substantial services trade with
Canada. In 2004, the United States exported $29.7 billion worth of services to
Canada and imported $20.0 billion, for a surplus of $9.7 billion. Canada is the third
largest destination for U.S. service exports after the United Kingdom and Japan,
accounting for 9.3% of U.S. service exports. Imports from Canada represent about
7.8% of total U.S. service imports, and rank second in magnitude after the United
Kingdom. 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.14
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
12.7% of exports and 16.8% of imports in 2004. Commercial services made up about
half of Canadian service trade in 2004 and travel and tourism totaled another 27.5%.
U.S. travelers accounted for 59% of worldwide travel expenditures to Canada in
2004; Canadian tourists spent 55.8% of their tourist dollars in the United States that
year.15
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 $234.8 billion in 2005, a figure that has
more than doubled from $97 billion in 1997. This figure represents 11.3% of U.S.
direct investment abroad (DIA), and U.S. investors accounted for 64% of inbound
foreign direct investment (FDI) in Canada in 2005.16 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 $144.0 billion, 8.8% of the total FDI stock in the United States. The United
States is the most prominent destination for Canadian DIA, with a stock of 46% of
total Canadian DIA in 2005.
14 U.S. Bureau of Economic Analysis, Survey of Current Business, October 2005;
Industry Canada, Trade and Investment Monitor 2004,
[http://strategis.ic.gc.ca/epic/internet/ineas-aes.nsf/en/h_ra01873e.html]
15 Statistics Canada, Canada’s Balance of International Payments, Table 5D: “Canada’s
International Transactions in Services by Selected Countries.”
16 Statistics Canada, The Daily, May 24, 2006. ([http://www.statcan.ca/Daily/English/
060524/td060524.htm])

---

CRS-10
Canada is also highly dependent on FDI. In 2005, FDI represented 30.3% of
Canada’s GDP, and Canadian DIA represented 33.9% of GDP, both figures up from
about 20.0% in 1995. Flows of FDI
Figure 2. FDI Flows 1999-2005
slowed for both nations after 2000,
billions, US$
but have picked up again in the
29.8
30
27.3
current economic expansion.
26.4
24.9
25 22.8
21.4
22
Canadian FDI Policy.
20
18.5
16.9
16.8
Foreign investment has played a
13.9
15
large part in the development of the
9.2
Canadian economy. British and
10
American capital was instrumental
5
2.9
3.2
in building Canada’s railways in the
0
19th century and in exploiting its
1999
2000
2001
2002
2003
2004
2005 resources in the 20th. Although
Canada is generally open to foreign
FDI: Can to US
investment, certain restrictions do
FDI US to Can
Source: U.S. Bureau of Economic Analysis (BEA)
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
Figure 3. FDI Stock 1999-2005
Canada. The review threshold for
billions, US$
parties to the World Trade
250
235
Organization (WTO), including the
213
United States, is $223 million. All
200
188
transactions involving uranium
167
153
144
production, financial services,
150
132
126
120
114
transportation services, or cultural
91
92
93
96
100
business17 must be reviewed. Net
benefit is assessed on such factors as:
50
effect on level of economic activity in
Canada including employment; the
0
degree or significance of participation
1999
2000
2001
2002
2003
2004
2005
by Canadians; the effect of
US in Can
Can in US
productivity and technological
Source: BEA
development; the effect on
competition; the effect on Canadian
competitiveness on world markets; and compatibility with national, industrial, or
cultural policies. No investment by a non-resident has been rejected under this
authority, but in some instances investments have been altered pursuant to
Investment Canada guidance.18
17 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.
18 C.D. Howe Institute, “A Capital Story: Exploding the Myths of Around Foreign
(continued...)

---

CRS-11
Figure 4. Net Inward FDI Flows
The last Liberal government of
from All Countries: 2000-2005
PM Paul Martin introduced legislation
billions, US$
to provide for a review of foreign
350
investment for national security
321
300
concerns. Under the legislation (Bill C-
59, which received first reading on June
250
20, 2005), any direct or indirect
200
167
investment can be subject to additional
150
133
review under the Investment Canada
110
100
84
Act if it could be “injurious to national
67
64
50
34
security,” although that phrase is not
28
22
8
2
further defined. An investment found
0
2000
2001
2002
2003
2004
2005
to be “injurious” could be blocked or
conditions could be placed on the
United States
Canada
transaction. Critics claim that the bill
Source: Economist Intelligence Unit
would introduce uncertainty into the
investment process, at a time when
investment in Canada is declining.19 The measure was not acted upon. Others warn
that diversion of resources through increased FDI such as Chinese investment in the
oil sands could have political implications for U.S.-Canadian relations.
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. On April 27, 2006, the United States and Canada agreed
to a deal that, if implemented, would resolve the longstanding softwood lumber
dispute, perhaps the most intractable trade dispute between the two nations. This
agreement was signed in Ottawa on September 12 by USTR Susan Schwab and
Canadian Trade Minister David Emerson. The agreement was implemented on
October 12, 2006. This follows a summer in which the Canadian government of
Prime Minister Stephen Harper enlisted support for the agreement among Canadian
provinces and among what he called “a clear majority” of the Canadian lumber
industry.20 On September 19, 2006, the Canadian Parliament approved a Ways and
18 (...continued)
Investment in Canada,” p. 21.
19 “Bill C-59: Foreign Investment Will Become Unpredictable and Politicized if Ottawa
Caves into Vague National Security Concerns,” National Post, July 19, 2005.
20 “Canadian Softwood Industry Support Enough for Deal to Proceed,” International Trade
(continued...)

---

CRS-12
Means motion establishing the agreement’s export tax by a vote of 176-112, with the
Bloc Quebecois, the Quebec nationalist party in the Federal Parliament, assisting the
Conservatives in passing the measure. The government has promised to bring the
overall agreement itself to a vote in the fall session as a confidence measure.
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 proposed deal would end all antidumping and countervailing duty litigation
and return $4 billion of the estimated $5 billion in antidumping and countervailing
duties collected since 2002 to the Canadian lumber industry. The remaining $1
billion would be split; half would go to U.S. lumber companies and the rest used for
a joint North American lumber initiatives and other “meritorious initiatives,” such
as possible Katrina rebuilding efforts.
The Canadian government would implement a supply management system for
its lumber exports involving export taxes and quotas based on the price of lumber.
If the price of lumber remains above $355/thousand board feet, no quotas or tariffs
would be imposed. (Current prices are about $370 per board feet.) If prices fall below
this threshold, each province could either choose to pay a sliding-scale export tax that
would increase as the price falls, or pay a smaller tax along with agreeing to a market
share limitation based on a province’s share of total exports to the United States.
Under the former, provincial producers would pay a sliding-scale export tax of 5%
if prices fall below $350, 10% if prices fall below $335, and 15% if prices fall below
$315. Under the hybrid methodology, each province has a share of the U.S. market.
Thus, if the benchmark price falls below $355, each province’s exports would be
capped at its share of 34% of the U.S. market with an export tax of 2.5%, its share
of 32% of the U.S. market combined with a tax of 3% at prices below $335, and its
share of 30% of the U.S. market with a 5% tax at prices below $315.
The agreement would last for seven years with an option of a two year renewal.
Maritime provinces (which have private timber ownership) and other producers not
engaged in the litigation would be exempt from the agreement. The agreement also
provides for a surge mechanism if exports from a Canadian province exceed 110%
of its allocated share. Conversely, if in two consecutive quarters third country exports
to the United States increase by 20%, Canadian market share decreases, and U.S.
20 (...continued)
Reporter, August 24, 2006.

---

CRS-13
market share increases, Canada is authorized to refund any export taxes collected in
that quarter.
Before the agreement is finalized, all parties to the dispute must agree to its
implementation. The deal was brokered by the United States and Canadian federal
governments; it must also receive the approval of the Canadian provinces and the
respective private industries. Canadian provinces must approve the deal because
natural resources are a provincial jurisdiction in Canada. Each province has given its
approval, with various degrees of enthusiasm. Producers involved in the litigation
in each country must also sign on to the deal because they must agree to terminate
pending litigation under the trade remedy laws of both countries. The U.S. Coalition
for Fair Lumber Imports has supported the agreement, but Canadian producers have
split. This agreement provides a framework for negotiations of a final accords.
Continuing concerns by stakeholders on both sides of the border may be addressed
in these negotiations.
Generally, proponents of the agreement view it as the best deal that could be
obtained by negotiation. To proponents, the alternative was continuing litigation,
with its inherent risk and uncertainty to each side. Through various restrictive
mechanisms, U.S. producers would be able to avoid free trade in lumber with
Canada, which, they maintain, continues to subsidize its producers through provincial
ownership of Crown lands. U.S. producers would also able to keep about 10% of the
duties collected by the U.S. government despite a Court of International Trade ruling
that the Byrd Amendment did not apply to duties collected from NAFTA countries
(see below). Canadian proponents point out that Canadian producers would get most
(80%) of their antidumping and countervailing duties back. They contend that while
trade is still managed, proceeds of an export tax would be retained in Canada, rather
than paying antidumping and countervailing duties to the United States. Proponents
in Canada also note that unless lumber prices drop below the $355 benchmark, there
will be no restrictions on the U.S. market. While prices were above that level around
the time the agreement was proposed, subsequently, lumber prices have fallen
dramatically. With lumber prices around $270 on the date of implementation
(October 12, 2006), the full 15% export tax will be applied.
Opponents of the deal include consumers of softwood lumber, such as U.S.
homebuilder and homebuyer groups, and Canadian opposition parties. The former
claim that the deal will hurt consumers through higher prices for new homes and
materials for renovation. Canadian opposition leaders have attacked the deal as a
“sell-out”21 to U.S. lumber interests. Some claim that the agreement scuttles that
NAFTA dispute settlement process, which they believe would have provided Canada
with an eventual victory in the dispute.
Regulatory and Legal Avenues. While the softwood lumber litigation has
been put in abeyance by the implementation of the accord, some Canadian producers
as yet have not agreed to terminate their litigation. The following is an overview of
21 New Democratic Party leader Jack Layton, in “Revised Deal Ends Lumber Dispute,”
Toronto Star, April 28, 2006.

---

CRS-14
the status of the regulatory and legal tracks of the dispute at the time of the
agreement’s implementation.
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). 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, to 1.2% in July 2005, and
to 0.80% in November 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
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 a de minimus 0.80%. On March 17, 2006, a NAFTA binational panel
affirmed the de minimus 0.80% subsidy, a level at which under U.S. law
countervailing duties may not be imposed. On April 27, 2006, the USTR announced
that it was filing a NAFTA Extraordinary Challenge Committee (ECC) appeal in
response to this ruling, but it would drop the appeal if a final softwood lumber
agreement was reached.

---

CRS-15
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”22 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 average 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 July 2005 remand raised the average dumping duty to 10.06%
and the “all-other” 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
review this decision, and the panel upheld the U.S. determination on November 15,
2005. The Appellate Body reversed this determination in April 2006, citing an
inadequate standard of review, but did not review the injury determination itself.
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
ECC in November 2004, and a decision was rendered on August 10, 2005, which
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 (reaffirmed in response to WTO dispute
settlement) 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
22 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-16
the implementation of the November 2004 determination in the U.S. Court of
International Trade (CIT). In July 2006, the CIT ruled in favor of Canada,
determining that the United States had no basis in continuing the duties under the
November 2004 determination.
The Canadian government and press have expressed strong disapproval at the
U.S. decision, and some have called for retaliation against the United States. 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.
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).23 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. The Deficit Reduction Act of 2005
(P.L.109-171) repealed the Byrd Amendment, but allowed the distribution of
antidumping duties collected on imports before October 1, 2007. On another legal
front, the U.S. Court of International Trade (CIT) ruled in April 2006 that
antidumping duties collected from Canada and Mexico could not be distributed to
firms under the Byrd amendment because the Byrd language did not specifically refer
to Canada and Mexico, a requirement under NAFTA implementing legislation. On
September 28, 2006, U.S. Customs and Border Protection announced that it would
not be distributing FY2006 antidumping duties from Canada and Mexico to affected
domestic producers.24
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
23 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.
24 “CBP to Withhold Byrd Act Distributions Related to Goods From Canada, Mexico,”
International Trade Reporter, October 5, 2006.

---

CRS-17
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.25
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,
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.26
Corn. In December 2005, Canada placed antidumping and subsidy duties on
unprocessed grain corn from the United States. These determinations, a 26% average
dumping margin and an 18% weighted subsidy average, were imposed by Canada on
March 15, 2006, and reflect a preliminary combined determination of C$1.65/bushel
in effect since December 2005. However, on April 19 the Canadian International
Trade Tribunal ruled that these imports of U.S. grain corn have not caused nor
threatened to cause injury to Canadian domestic producers. The absence of an injury
determination, as in U.S. law, means that Canadian customs may no longer collect
duties and must refund those already collected. Prior to this decision, the United
States requested consultations with Canada on the preliminary injury determination,
a step in launching WTO dispute settlement action.
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 2006.27 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 treaty28, which has been signed but not ratified. 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 without a court
25 Congress Daily, July 19, 2005.
26 EDC Weekly Commentary, “Mad Cow Roundup,” August 3, 2005. [http://www.edc.ca/
docs/ereports/commentary/weekly_commentary_e_7574.htm]
27 United States Trade Representative, 2006 Special 301 Report, [http://www.ustr.gov/
Document_Library/Reports_Publications/2006/2006_Special_301_Review/Section_
Index.html].
28 The WIPO Copyright Right treaty updates existing copyright protections for Internet and
other electronic media.

---

CRS-18
order. However, USTR commended Canadian cooperation with several IPR
enforcement initiatives, including an international cooperative law enforcement effort
to suppress online piracy.
Wheat. On October 23, 2002, the U.S. Commerce Department announced
antidumping(AD) and countervailing duty (CVD) investigations on Canadian durum
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. The ITC voted on October 5, 2005, that no injury exists.
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 obligations29 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.
29 National treatment refers to the WTO obligation to treat goods from other countries in
a like manner to domestically produced goods.

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CRS-19
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
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.30 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.31 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.”32
Western Hemisphere Travel Initiative (WHTI). A provision of the
Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), the WHTI
will require all travelers from Canada and Mexico to present a passport or another
form of secure documentation to enter the United States starting January 1, 2007, for
air and sea travelers, and starting a year later for land passage. Currently, most land
30 George Jackson, Douglas Robideaux, and John Taylor, “The U.S.-Canada Border: Cost
Impacts, Causes, and Short to Long Term Management Options.”
[http://www.fhwa.dot.gov/uscanada/ studies/taylor/costrpt_2003.pdf].
31 Ibid.
32 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].

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travelers enter with a driver’s license or other form of government identification.
While travelers could use existing passports to cross the border, it is estimated that
only 20% of Americans and 38% of Canadian currently hold them. In response, the
Department of Homeland Security (DHS) and the Department of State (DOS)
announced the establishment new form of identification known as the People Access
Security Service (PASS) card. This card would resemble many current driver’s
licenses, but would contain a biometric identifier and provide documentation of
citizenship. Concerns have been expressed by the Canadian government, by some
business organizations on both sides of the border, and by some members of
Congress that the measure will impede travel and trade on the northern border. Some
fear that many border-area residents will not obtain the PASS card and will no longer
make routine trips across the border as they do currently.
The FY2007 Homeland Security Appropriations Act (P.L. 109-295) directed the
Secretary of Homeland Security, in consultation with the Secretary of State, to
develop a plan to implement the WHTI and to certify to Congress that certain criteria
(standards for the card, the fee for the card, technology sharing with Canada and
Mexico, and installation of infrastructure and training at border crossing to process
the cards) included in the act are met (Sec. 546). The act provides for the program’s
implementation by the earlier of three months of the certification or June 1, 2009.
This language may delay implementation of the program from the original
implementation dates. This language replaced a Senate-passed amendment that
would have delayed land border implementation to January 1, 2009.
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 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.33 The leaders
met again in Cancun, Mexico, in March 2006.
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
33 “NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
May 13, 2005.

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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.34 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 2004.35 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”
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,
34 Smart Border Action Plan Status Report, December 17, 2004.
[http://www.dfait-maeci.gc.ca/can-am/washington/border/status-en.asp]
35 Ibid.

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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
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

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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
“security trumps trade” in the U.S.-Canada relationship.36 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.37
36 “Cellucci’s Message,” National Post, March 26, 2003.
37 “NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
(continued...)

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The initial 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. 38 Since the initial report, the United States and Canada have
agreed to facilitate the exchange of information on infectious disease outbreaks,
concluded an open sky agreement, and signed a memorandum of understanding on
pipeline safety. In June 2006, the three nations launched a North American
Competiveness Council, which is made up of business leaders from each nation who
will examine proposals and provide recommendations to improve the
competitiveness of North American business in global markets.
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
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.
37 (...continued)
May 13, 2005.
38 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]

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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
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

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Federal Reserve districts, Canada’s ability to influence U.S. monetary policy in a
monetary union would be small.

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