Order Code RL33087
United States-Canada Trade and Economic
Relationship: Prospects and Challenges
Updated January 29, 2008
Ian F. Fergusson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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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 $533.7
billion in 2006. 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
2006, total merchandise trade with Canada consisted of $303.4 billion in imports and
$230.3 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 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 the 2006 softwood lumber
agreement are under arbitration and agriculture subsidies are being addressed by
dispute settlement body at the WTO. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Beef . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Agriculture Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Intellectual Property Rights (IPR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Security and Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Western Hemisphere Travel Initiative (WHTI) . . . . . . . . . . . . . . . . . . 17
Action Programs and Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Prospects and Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Economic Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
NAFTA Plus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Security Perimeter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Customs Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Common Market or Economic Union . . . . . . . . . . . . . . . . . . . . . . . . . 22
Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
List of Figures
Figure 1. U.S. Trade Deficit with Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 2. FDI Flows 2001-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 3. FDI Stock 2001-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 4. Net Inward FDI Flows from All Countries: 2001-2006 . . . . . . . . . . . . 11
List of Tables
Table 1. Selected Comparative Statistics, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 2. U.S. Merchandise Trade With Canada, 2006 . . . . . . . . . . . . . . . . . . . . . 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 67% of GDP in 2006. The United States has a lower ratio of debt-to-GDP,
but it has been trending upward with current fiscal policies.
Table 1. Selected Comparative Statistics, 2006
Indicator
United States
Canada
GDP
Nominal (billion US$)
13,247
1,267
Purchasing power parity (PPP) (billion $)
13,247
1,115
Per Capita GDP
Nominal ($)
44,244
38,840
PPP ($)
44,244
34,180
Real GDP Growth
3.3%
2.7%
Recorded Unemployment Rate
4.6%
6.3%
Exports (%GDP)
7.8%
31.9%
Imports (%GDP)
14.0%
28.1%
Sectoral Components of GDP (%)
Industry
20.9%
29.0%
Services
78.2%
68.9%
Agriculture
0.9%
2.1%
Current Account Balance (% GDP)
-6.5%
1.7%
Public Debt/GDP
37.1%
67.0%
Sources: Economist Intelligence Unit; Census Bureau; 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
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 a relatively 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.

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CRS-3
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 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 2006,
total merchandise trade with Canada was $533.7 billion (a 6.9% increase over 2005),
consisting of $303.4 billion (5.4% over 2005) in imports and $230.3 billion (8.9%
over 2005) in exports.2 In 2006, nearly $1.5 billion in goods crossed the border each
day. Trade with Canada represented nearly 18.5% of U.S. total trade in 2006, with
Canada purchasing 22.2% of U.S. exports and supplying 16.4% 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
65% of Canada’s imports of goods in 2006, and purchased 79% 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
21.8% in 2006, the comparable figure for Canada was nearly 60%. Canada’s goods
exports represent 31.9% of Canadian GDP and exports to the United States alone
represent 26.9% of Canadian GDP. A further 18.2% of Canadian GDP is used to
purchase U.S. goods. Canada is relatively more exposed to the world economy and
to the fortunes of other economies, foremost the United States, than most other countries.
2 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
Autos and auto parts are the top
U.S. exports to, and imports from,
The Productivity Conundrum
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 40 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,
reflecting the substantial integration
2004; Conference Board of Canada, Performance and
Potential 2003-4: Defining the Canadian Advantage.
of the two economies and

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CRS-5
contributing to increased efficiency and competitiveness of firms on both sides of
the border.3
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 21.3% of U.S. exports to
Canada and 22.2% of U.S. imports from Canada (see Table 2). 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 2006,
2.30 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 had 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.4 However, one recent report suggested
that the price advantage to Canadian production is dwindling, down to $250 per
vehicle in 2003 from $400 in 2000.5 Another suggests that the rising Canadian dollar
will erase all cost-advantage to Canadian manufacturing by 2007.6
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
3 World Trade Organization, Trade Policy Review: Canada, Report by the Secretariat,
October 6, 1996, (WT/TPR/S/22), p. 6.
4 “Ontario to Overtake Michigan As Auto Kingpin,” The New York Times, November 29,
2004.
5 Scotiabank Canadian Auto Report, June 28, 2005.
6 “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.7 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.8 In addition, Canadian auto parts manufacturing reportedly
has lost an estimated 10,000 jobs since 2003.9 However, Toyota is expanding
operations in Canada, and the Big 3 continue to plan significant new investments to
upgrade plants.10
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 2006, Canada imported $30.3 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 $6.7 billion of 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.11
7 “GM to Cut 3600 Jobs in Ontario,” CBC.Ca News, November 21, 2005.
8 “Ford’s Canada Cuts Limited,” The Globe and Mail, January 23, 2006
9 “Auto Sector to Pump $4.9 billion into Plants,” Ottawa Citizen, March 15, 2006.
10 “Canada en route to Losing Car-Maker Advantage,” Globe and Mail, February 27, 2006.
11 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 13.7
9.5
3.5
4.6
5.3
6.3
7.4
8.3
5.6
6.3
0
-6
-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
-73.1
-80
-76.5
1991
1994
1997
2000
2003
2006
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.12
Trade Deficit. The U.S. merchandise trade deficit with Canada decreased
slightly (4.4%) from its record $76.5 billion in 2005 to $73.1 billion in 2006. Imports
generally have grown faster than exports in the free trade era, increasing from 3.5%
of the value of total trade in 1991 to 15.3% in 2005. However, this trend was
reversed in 2006 with the ratio falling to 13.7%. The persistent trade deficit with
Canada has been blamed on many factors. Up until 2003, the 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
11 (...continued)
C.D. Howe Institute, September 2004.
12 “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
U.S.-Canada Free Trade Agreement in 1989, the currency briefly sank to $0.63 in
2002. The loonie bounced back to an average of $0.71 in 2003, $0.75 in 2004, and
$0.83 in 2005 and $0.88 in 2006. The loonie began the year at nearly $0.86, and since
then has experienced an unprecedented appreciation, reaching parity for the first time
in 31 year on September 20, 2007, before peaking at an intraday high of $1.10 on
November 7. Since that date, the loonie has crossed the parity line 3 in its relation to
the U.S. dollar. Increased prices for natural resources and energy, attributed to the
global expansion and Chinese development has contributed to the loonie’s strength,
as has the general weakness of the U.S. dollar. In 2006, the depreciating U.S. dollar
— which makes cheaper U.S. goods more attractive on the Canadian market —
began to have an ameliorative effect on the U.S.-Canadian trade deficit and that may
continue in 2007. For Canada, the loonie’s appreciation has taken a toll on its
manufacturing industry centered in Ontario and Quebec. However, Canadian
consumers have responded to their now strengthened currency with what has been
called a “social epidemic” of cross-border price comparisons. This rush of Canadian
shoppers across the border, which reached multi-year highs in September 2007, has
reportedly caused traffic jams and parking problems at border-area malls and
shopping districts in the United States.13
Table 2. U.S. Merchandise Trade With Canada, 2006
Amount
Amount
Export Category
Import Category
(billion$)
(billion$)
Motor Vehicle Parts
$26.5
Oil and Gas
$59.5
Motor Vehicles
$22.6
Motor Vehicles
$47.1
Computer Equipment
$8.4
Vehicle Parts
$16.9
Agriculture/
$7.8
Petroleum and Coal
$10.5
Construction
Products
Machinery
Special Classification
$7.4
Pulp, Paper, Paperboard
$10.3
Machinery
$7.2
Returned/Reimported
$9.4
Chemicals
$6.3
Nonferrous Metal and
$8.8
Processing
Materials/
$6.2
Special Classification
$8.4
Resins/synthetic fibers
Iron/Steel/Ferroalloy
$6.1
Aluminum
$7.9
Semiconductors
$5.8
Sawmill and Wood
$6.8
Products
Engines/Turbines/ Power
$5.5
Aerospace Products and
$6.7
Transmission Equipment
Parts
13 “Price-savvy ‘Social Epidemic’ Sweeps U.S. Border,” Globe and Mail, November 21,
2007.

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CRS-9
Amount
Amount
Export Category
Import Category
(billion$)
(billion$)
Navigation/Electrical/
$5.2
Basic Chemicals
$6.3
Medical/Control
Instruments
Aerospace Products/Parts
$4.6
Resin, Synthetic Rubber,
$5.9
artificial fibers
Plastics Products
$4.5
Plastics Products
$5.1
Fabricated Metal
$4.5
Iron/Steel/Ferroalloy
$4.7
All Other
$101.7
All other
$89.2
Total
$230.3
Total
$303.4
Source: U.S. International Trade Commission. (Figures are NAIC-4, Total Exports and General
Imports.)
Note: May not total due to rounding.
Services. The United States also conducts a substantial services trade with
Canada. In 2006, the United States exported $39.3 billion worth of private services
to Canada and imported $23.5 billion, for a surplus of $15.8 billion. Canada is the
third largest destination for U.S. service exports after the United Kingdom and Japan,
accounting for 9.7% of U.S. service exports. Imports from Canada represent about
7.6% of total U.S. service imports, and rank third in magnitude after, again, the
United Kingdom and Japan. In 2006, U.S. service exports represented 57% of
Canadian service imports, and Canadian service exports to the United States
represented 55% of total Canadian service exports.14 Commercial services made up
about 53% of Canadian service trade in 2006 and travel and tourism totaled another
25.2%. U.S. travelers accounted for 53% of worldwide travel expenditures to
Canada in 2006; Canadian tourists spent 56% 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 $246.5 billion in 2006, a figure that has
more than doubled from $97 billion in 1997. This figure represents 10.3% of U.S.
direct investment abroad (DIA), and U.S. investors accounted for 61% of inbound
foreign direct investment (FDI) in Canada in 2006.16 Manufacturing, finance/
14 U.S. Bureau of Economic Analysis, Survey of Current Business, October 2007; Statistics
Canada, Balance of International Payments - Fourth Quarter 2006, Table 18. Available at
[http://www.statcan.ca/english/freepub/67-001-XIE/2006004/tablesectionlist.htm].
15 Statistics Canada, Balance of International Payments, Table 17, Table 60.
16 BEA, Survey of Current Business, July 2007; Statistics Canada, The Daily, May 9, 2007.
(continued...)

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CRS-10
insurance, 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
$159.0 billion, 8.9% of the total FDI stock in the United States. The United States is
the most prominent destination for Canadian DIA, with a stock of 42.7% of total
Canadian DIA in 2006.
Canada is also highly dependent on FDI. In 2006 FDI represented 31.4% of
Canada’s GDP, and Canadian DIA represented 36.1% of GDP17, both figures up from
about 20.0% in 1995. Flows of FDI,
Figure 2. FDI Flows 2001-2006
which have picked up during the
billions, US$
early years of the present economic
29.6
28.9
30
expansion, have slowed again since
24.8
25.1
25
2005.
20.5
20 16.8
Canadian FDI Policy.
13.9
15
13
Foreign investment has played a
9.2
10
large part in the development of the
4.8
Canadian economy. British and
5
3.2
American capital was instrumental
0.1
0
in building Canada’s railways in the
2001
2002
2003
2004
2005
2006 19th century and in exploiting its
resources in the 20th. Although
FDI: Can to US
Canada is generally open to foreign
FDI US to Can
Source: U.S. Bureau of Economic Analysis (BEA)
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
Figure 3. FDI Stock 2001-2006
parties to the World Trade
billions, US$
Organization (WTO), including the
246
250
233
United States, is $223 million. All
213
transactions involving uranium
200
188
production, financial services,
167
153
154
159
transportation services, or cultural
150
125
92
93
96
100
50
0
2001
2002
2003
2004
2005
2006
US in Can
Can in US
Source: BEA
16 (...continued)
See [http://www.statcan.ca/Daily/English/070509/d070509a.htm].
17 Ibid.

---

CRS-11
business18 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 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.19
Figure 4. Net Inward FDI Flows
The last Liberal government of
from All Countries: 2001-2006
PM Paul Martin introduced legislation
billions, US$
to provide for a review of foreign
200
investment for national security
183
concerns. Under the legislation (Bill C-
144
150
59, which received first reading on June
122
20, 2005), any direct or indirect
99
100
investment can be subject to additional
74
69
review under the Investment Canada
53
50
Act if it could be “injurious to national
28
29
22
security,” although that phrase is not
7
0
further defined. An investment found
0
2001
2002
2003
2004
2005
2006
to be “injurious” could be blocked or
conditions could be placed on the
United States
Canada
Source: Economist Intelligence Unit
transaction. Critics claim that the bill
would introduce uncertainty into the
investment process, at a time when investment in Canada is declining.20 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
18 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.
19 C.D. Howe Institute, “A Capital Story: Exploding the Myths of Around Foreign
Investment in Canada,” p. 21.
20 “Bill C-59: Foreign Investment Will Become Unpredictable and Politicized if Ottawa
Caves into Vague National Security Concerns,” National Post, July 19, 2005.

---

CRS-12
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 reached
an agreement to resolve the longstanding softwood lumber dispute, perhaps the most
intractable trade dispute between the two nations.21 This agreement, however, has
now become the subject of arbitration between the two countries. The 2006
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.22 The Canadian Parliament approved legislation implementing the
agreement on December 14, 2006.
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 deal ends 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 was split; half
went to U.S. lumber companies and the rest was used for a joint North American
lumber initiatives and other “meritorious initiatives,” such as possible Katrina
rebuilding efforts.
The Canadian government implemented a supply management system for its
lumber exports involving export taxes and quotas based on the price of lumber.
Under the agreement, if the price of lumber remains above $355/thousand board feet,
no quotas or tariffs would be imposed. 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
21 For more information, see CRS Report RL33752, Softwood Lumber Imports from
Canada: Issues and Events, by Ross Gorte and Jeanne Grimmett.
22 “Canadian Softwood Industry Support Enough for Deal to Proceed,” International Trade
Reporter, August 24, 2006.

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CRS-13
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 lasts 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 are 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 third country exports to the United States
increase by 20% in two consecutive quarters, Canadian market share decreases, and
U.S. market share increases, Canada is authorized to refund any export taxes
collected in that quarter.
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 attacked the deal as a “sell-
out”23 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.
Arbitration. In April 2007, the United States requested consultations with
Canada on various aspects of the agreement. The United States sought clarification
of several forest sector assistance programs providing grants, loans, and tax credits
by the Canadian federal government and the provinces of Quebec and Ontario. The
United States has also expressed concern about the administration of the surge
23 New Democratic Party leader Jack Layton, in “Revised Deal Ends Lumber Dispute,”
Toronto Star, April 28, 2006.

---

CRS-14
mechanism, claiming that Canada has not adjusted its export level triggers to reflect
actual consumption in the United States market. If Canada had done so, the United
States claims, additional export taxes would have been collected from lumber
producers in British Columbia and Alberta, provinces subject only to export taxes,
and the quota would have been lowered for provinces using the mixed quota- export
system ( Ontario and Quebec). On August 13, 2007, the United States made a formal
request for arbitration on the export tax-quota issue and submitted its first written
arguments on October 19. The United States requested arbitration over the six
provincial assistance programs on January 18, 2008 although it did not seek
arbitration over the Federal Industry Long-Term Competitiveness Initiative, a source
of concern in the initial consultations.24 At the same time, USTR announced that it
was seeking information from Canada over a new federally administered
“Community Development Trust”designed to help “one-industry towns facing major
downturns, or communities plagued by high unemployment, or regions hit by layoffs
across a range of sectors,” according to Prime Minister Stephen Harper.25 Some fear
this mechanism may provide support to the Canadian lumber industry in
contravention of the SLA.
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. During the next three years another 10 cases of BSE would be found.
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 U.S.
Department of Agriculture (USDA) rulemaking proceeding initiated in November
2003. During a visit to Canada in December 2004, President Bush reportedly assured
then-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.26
24 “U.S. Requests Arbitration with Canada on Assistance Programs,” Inside U.S. Trade,
January 25, 2008.
25 quoted in “Canadian Aid Plan for Embattled Industries Draws U.S. Fire as Subsidy for
Lumber Sector,” International Trade Reporter, January 17, 2008.
26 Congress Daily, July 19, 2005.

---

CRS-15
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.27
USDA released a final rule to allow for the importation of Canadian live cattle
above age 30 months on September 14, 2007.28 This rule was accompanied by a
notice of implementation of a delayed portion of the first rulemaking allowing beef
imports over 30 months and became effective on November 19, 2007. Resolutions
have been introduced in both the House (H.J.Res. 55, Herseth-Sandlin) and Senate
(S.J.Res.20, Dorgan) to block implementation of the final rule. In addition, R-CALF
and several consumer and health organizations have filed suit to block the
implementation of the final rule.29
Agriculture Subsidies. On December 17, 2007, the WTO established a
combined panel at the request of Canada and Brazil over U.S. trade-distorting farm
subsidies. The request alleges that these subsidies, known in WTO parlance as
“amber-box” subsidies exceeded the levels allowed in years 1999-2002 and 2004-5.
Under the WTO Agreement on Agriculture, the United States is permitted $19.1
billion in these types of subsidies. Canada alleges that certain subsidies the United
States claims as non-trade-distorting properly should be classified as trade-distorting
subsidies, and that if they were, the United States would breach its WTO
commitment levels. This request supersedes an earlier one filed by Canada in June
2007 that also challenged U.S. export credit guarantees. That issue is not included in
the current request.30
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 2007.31 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 treaty32, which has been signed but not ratified. The United
27 EDC Weekly Commentary, “Mad Cow Roundup,” August 3, 2005. [http://www.edc.ca/
docs/ereports/commentary/weekly_commentary_e_7574.htm]
28 72 Federal Register 53314, September 18, 2007.
29 “R-CALF, Others File Lawsuit to Halt Opening of Canadian Border Beef Trade,”
International Trade Reporter, November 8, 2007.
30 For further information, see CRS Report RL33853, Canada's WTO Case Against U.S.
Agricultural Support, by Randy Schnepf.
31 United States Trade Representative, 2007 Special 301 Report, p. 30. Available at
[http://www.ustr.gov/assets/Document_Library/Reports_Publications/2007/2007_Special
_301_Review/asset_upload_file230_11122.pdf].
32 The WIPO Copyright treaty updates existing copyright protections for Internet and other
(continued...)

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CRS-16
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
order. However, USTR commended Canada for adopting regulations strengthening
protection of pharmaceutical testing data required to obtain marketing approval.
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.33 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.34 The total midrange figure, $10.3 billion, reflected
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
32 (...continued)
electronic media.
33 George Jackson, Douglas Robideaux, and John Taylor, “The U.S.-Canada Border: Cost
Impacts, Causes, and Short to Long Term Management Options.” Available online at
[http://www.fhwa.dot.gov/uscanada/ studies/taylor/costrpt_2003.pdf].
34 Ibid.

---

CRS-17
ever seen.”35 However, a July 2007 study indicated that increased border security has
not affected Canadian export volumes to the United States through most land ports,
although the study found evidence that substitution between ports may have
occurred.36
Western Hemisphere Travel Initiative (WHTI). A provision of the
Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458), the WHTI
required 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
travelers, and starting a year later for land passage. Currently, most land 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.
In December 2007, the Consolidated Appropriations Act of 2008 (P.L. 110-161)
amended that language to provide that the plan shall not take effect until the later of
three months after the certification of the plan or June 1, 2009. Nonetheless, DHS
has announced that it will tighten the requirements on the border from January 31,
2008 to require written documentation of citizenship such as a passport or both a
birth certificate and driver’s license to denote identity and citizenship.37
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
35 Coalition for Secure and Trade-Efficient Borders, “Rethinking Our Borders: A New North
American Partnership,” July 2005, available at [http://www.cme-mec.ca/pdf/Coalition_
Report0705_Final.pdf].
36 Conference Board of Canada, Tighter Border Security and Its Effect on Canadian
Exporters, June 2007.
37 DHS Press Release, January 18, 2007, [http://www.dhs.gov/xnews/releases
/pr_1200669485238.shtm]

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CRS-18
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.38 The leaders
met again in Cancun, Mexico, in March 2006, and Montebello, Quebec in August
2007.39
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 20 high-volume land
ports of entry on the northern border. 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 2004.40 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.
38 “NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
May 13, 2005.
39 For further information, see CRS Report RS22701, Security and Prosperity Partnership
of North America: An Overview and Selected Issues, by M. Angeles Villarreal and Jennifer
Lake.
40 Ibid.

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CRS-19
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,
several legal and institutional issues remain unresolved including land ownership,
the enforcement powers of such agents and their ability to carry firearms. However,
negotiations to implement a pilot program at the Peace Bridge crossing at Buffalo-
Fort Erie reportedly broke down in May 2007 over fingerprinting of Canadians who
approach but decide not to cross the border.41 Canadian law does not allow for
fingerprinting unless a person is charged with a crime or volunteers to be
fingerprinted.
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.
The FAST system provides for dedicated lanes at land border ports for expedited
preclearance. However, these lanes will not save time if the FAST participant cannot
access this lane due to congestion or delays at the points of access. The SPP
completed a pilot program that attained a 25% improvement in border crossing times
at the Detroit-Windsor gateway in December 2005, yet the aging and adequacy of the
border infrastructure may affect whether such improvements are sustainable. A
binational partnership to construct additional crossing capacity at the Detroit-
41 “Shared Inspection Plaza Concept Dropped,” Buffalo News, 26 April 2007.

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CRS-20
Windsor gateway is engaged in technical and environmental assessments of potential
new crossing sites; however, the opening of new bridge or tunnel capacity is not
envisioned before 2013.
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
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.

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NAFTA Plus. 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.42 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.43
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.44 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
42 “Cellucci’s Message,” National Post, March 26, 2003.
43 “NAFTA Ministers to Review Proposals for Integrating Economies,” Inside U.S. Trade,
May 13, 2005.
44 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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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.
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.

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

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