Canada-U.S. Relations
Carl Ek, Coordinator
Specialist in International Relations
Ian F. Fergusson, Coordinator
Specialist in International Trade and Finance
September 3, 2010
Congressional Research Service
7-5700
www.crs.gov
96-397
CRS Report for Congress
P
repared for Members and Committees of Congress
Canada-U.S. Relations
Summary
Relations between the United States and Canada, though generally close, have undergone changes
in tenor over the past three decades. During the 1980s, the two countries generally enjoyed very
good relations. The early 1990s brought new governments to Ottawa and Washington, and
although Canada’s Liberal Party emphasized its determination to act independently of the United
States when necessary, relations continued to be cordial. In early 2006, a minority Conservative
government assumed power in Ottawa. It was regarded as being more philosophically in tune
with the George W. Bush Administration than the Liberals were; some observers believe that this
compatibility helped facilitate bilateral cooperation. The election of President Obama November
2008 signaled a new chapter in U.S.-Canada relations; unlike President Bush, Obama is quite
popular in Canada.
The two North American countries continue to cooperate widely in international security and
political issues, both bilaterally and through numerous international organizations. Canada’s
foreign and defense policies are usually in harmony with those of the United States. Areas of
contention have been relatively few, but sometimes sharp, as was the case in policy toward Iraq.
Since September 11, the United States and Canada have cooperated extensively on efforts to
strengthen border security and to combat terrorism, particularly in Afghanistan.
The United States and Canada maintain the world’s largest bilateral trading relationship, one that
has been strengthened over the past two decades by the approval of two bilateral free trade
agreements. Although commercial disputes may not be quite as prominent now as they have been
in the past, the two countries in recent years have engaged in difficult negotiations over items in
several trade sectors, including natural resources, agricultural commodities, and the
cultural/entertainment industry. The most recent dispute has centered around the Buy America
provision of the 2009 economic stimulus law. However, these disputes affect but a small
percentage of the total goods and services exchanged. In recent years, energy has increasingly
emerged as a key component of the trade relationship. In addition, the United States and Canada
work together closely on environmental matters, including monitoring air quality and solid waste
transfers, and protecting and maintaining the quality of border waterways.
Many Members of Congress follow U.S.-Canada environmental, trade, and transborder issues
that affect their states and districts. In addition, because the countries are similar in many ways,
lawmakers in both countries study solutions proposed across the border to such issues as federal
fiscal policy and federal-provincial power sharing.
This report begins with a short overview of Canada’s political scene, its economic conditions, and
its recent security and foreign policy, focusing particularly on issues that may be relevant to U.S.
policymakers. This country survey is followed by several summaries of current bilateral issues in
the political, international security, trade, and environmental arenas. The questions following each
summary are designed as potential inquiries to Canadian officials to promote thought and
discussion among policymakers.
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Canada-U.S. Relations
Contents
Overview .................................................................................................................................... 1
Canada’s Domestic Scene ..................................................................................................... 2
Background and Current Political Situation ..................................................................... 2
National Unity ................................................................................................................ 5
Foreign and Security Policy Issues ........................................................................................ 5
U.S.-Canada Security and Foreign Policy Issues.............................................................. 7
Economic and Trade Issues ................................................................................................. 14
Budget Policy ............................................................................................................... 14
Energy .......................................................................................................................... 15
Bilateral Trade Issues .................................................................................................... 16
Environmental Issues .......................................................................................................... 19
Canada and Afghanistan............................................................................................................ 20
Issue Definition................................................................................................................... 20
Background and Analysis .................................................................................................... 21
Status of the Issue ............................................................................................................... 22
Questions ............................................................................................................................ 22
Canada’s Arctic Sovereignty Claim ........................................................................................... 23
Issue Definition................................................................................................................... 23
Background and Analysis .................................................................................................... 23
Status of the Issue ............................................................................................................... 24
Questions ............................................................................................................................ 25
Border Security Issues............................................................................................................... 25
Issue Definition................................................................................................................... 25
Background and Analysis .................................................................................................... 25
Western Hemisphere Travel Initiative.................................................................................. 26
Status of the Issue ............................................................................................................... 27
Questions ............................................................................................................................ 27
Border Security: Trade and Commercial Concerns .................................................................... 28
Issue Definition................................................................................................................... 28
Background and Analysis .................................................................................................... 28
Action Programs and Initiatives .................................................................................... 28
Status of the Issue ............................................................................................................... 29
Questions ............................................................................................................................ 30
Immigration and Refugee Policies ............................................................................................. 30
Issue Definition................................................................................................................... 30
Background and Analysis .................................................................................................... 31
Status of the Issue ............................................................................................................... 33
Questions ............................................................................................................................ 33
Canada’s Free Trade Agreement Agenda ................................................................................... 33
Issue Definition................................................................................................................... 33
Background ........................................................................................................................ 34
Status of the Issue ............................................................................................................... 35
Questions ............................................................................................................................ 35
G-8 and G-20 Leader Summits, June 2010 ................................................................................ 36
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Issue Definition................................................................................................................... 36
Background and Analysis .................................................................................................... 36
The G-8, the G-20, and the Financial Crisis................................................................... 36
The Toronto Summit ..................................................................................................... 37
Questions ............................................................................................................................ 39
North American Cooperation on Competitiveness and Security ................................................. 39
Issue Definition................................................................................................................... 39
Background and Analysis .................................................................................................... 40
Status of the Issue ............................................................................................................... 41
Questions ............................................................................................................................ 41
Canada’s Financial System........................................................................................................ 42
Issue Definition................................................................................................................... 42
Background and Analysis .................................................................................................... 42
Questions ............................................................................................................................ 44
Buy American Provisions .......................................................................................................... 44
Issue Definition................................................................................................................... 44
Background and Analysis .................................................................................................... 44
Status of the Issue ............................................................................................................... 46
Questions ............................................................................................................................ 46
U.S. Imports of Canadian Softwood Lumber ............................................................................. 47
Issue Definition................................................................................................................... 47
Background and Analysis .................................................................................................... 47
Status of the Issue ............................................................................................................... 48
Questions ............................................................................................................................ 49
Black Liquor ............................................................................................................................. 50
Issue Definition................................................................................................................... 50
Background and Analysis .................................................................................................... 50
Status of the Issue ............................................................................................................... 50
Questions ............................................................................................................................ 51
Country of Origin Labeling ....................................................................................................... 51
Issue Definition................................................................................................................... 51
Background and Analysis .................................................................................................... 52
Status of the Issue ............................................................................................................... 53
Questions ............................................................................................................................ 53
The Canadian Auto Sector......................................................................................................... 54
Issue Definition................................................................................................................... 54
Background and Analysis .................................................................................................... 54
Status of the Issue ............................................................................................................... 55
Questions:........................................................................................................................... 56
The Canadian Steel Sector......................................................................................................... 56
Issue Definition................................................................................................................... 56
Background and Analysis .................................................................................................... 57
Status of the Issue ............................................................................................................... 58
Questions:........................................................................................................................... 59
Intellectual Property Rights ....................................................................................................... 59
Issue Definition................................................................................................................... 59
Background and Analysis .................................................................................................... 59
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Special 301 Watch List.................................................................................................. 60
WIPO Internet Treaties ................................................................................................. 60
Copyright Legislation Reform....................................................................................... 60
IPR Enforcement........................................................................................................... 61
Access to Medicines...................................................................................................... 61
Questions ............................................................................................................................ 62
Electric Reliability, Trade, and Access to Renewable Power ...................................................... 62
Issue Definition................................................................................................................... 62
Background and Analysis .................................................................................................... 62
Reliability ..................................................................................................................... 63
Trade and Renewable Energy Development................................................................... 64
Status of the Issues.............................................................................................................. 65
Questions ............................................................................................................................ 65
U.S. Energy Security and Canadian Oil Sands ........................................................................... 65
Issue Definition................................................................................................................... 65
Background and Analysis .................................................................................................... 66
Status of the Issue ............................................................................................................... 67
Questions ............................................................................................................................ 67
Natural Gas Pipeline from Alaska.............................................................................................. 68
Issue Definition................................................................................................................... 68
Background and Analysis .................................................................................................... 68
Status of the Issue ............................................................................................................... 70
Questions ............................................................................................................................ 70
Great Lakes Restoration ............................................................................................................ 71
Issue Definition................................................................................................................... 71
Background and Analysis .................................................................................................... 71
The Great Lakes Restoration Initiative .......................................................................... 71
The Great Lakes Strategy .............................................................................................. 72
Restoring Areas of Concern the Great Lakes ................................................................. 72
Water Withdrawals From the Great Lakes...................................................................... 73
Status of the Issue ............................................................................................................... 73
Questions ............................................................................................................................ 73
Contacts
Author Contact Information ...................................................................................................... 74
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Canada-U.S. Relations
Overview1
Relations between the United States and Canada, though generally cordial, have undergone
several changes in tenor over the past three decades. The 1980s and early 1990s were marked by
an increasingly close partnership, whose milestones included the mid-1980s “Shamrock
Summits” (named after the Irish heritage shared by the two countries’ leaders, Brian Mulroney
and Ronald Reagan), the 1989 U.S.-Canada Free Trade Agreement, and the 1994 North American
Free Trade Agreement. To many Canadians, however, Ottawa seemed at times to have drawn a bit
too close to Washington, DC, with Canada casting itself too willingly in a secondary role.
In 1994, one Canada watcher observed that in the foreign policy arena, Canada “politely distances
itself from the United States” in certain ways. In an interview that year, the newly elected Liberal
Prime Minister Jean Chrétien summed up his view of the bilateral relationship: “We like each
other. I just don’t want Canada to be perceived as being the 51st state of America.” Many believe,
however, that this initial show of mild reserve was intended for domestic consumption, and that
Canada and the United States in fact continued to enjoy excellent relations. Chrétien and
President Bill Clinton are said to have had congenial meetings; they focused on areas where the
two countries were able to reach agreement, including environmental issues, cooperation on
border measures and technology projects. 2
In February 2001, President George W. Bush met with Chrétien. The two leaders discussed
energy, missile defense, and trade. After September 11, however, economic and environmental
issues often took a back seat to joint efforts to improve security, both at home and abroad. Canada
became involved in the crisis at the outset, and has cooperated closely with the United States in
efforts to combat international terrorism.
Nevertheless, Chrétien did not establish with President Bush the same rapport that he had enjoyed
with Clinton. Differences over a number of issues tended to strain relations. The Bush
Administration inherited some long-standing trade disputes, most notably over wheat and
softwood lumber, and Canada and the United States were on different sides of several
international issues, including the U.S. withdrawal from the ABM treaty and the International
Criminal Court. But it was over security-related matters, particularly defense spending, Iraq, and
missile defense, that the two governments had their sharpest differences. Despite these
controversies, Canada and the United States continued to work together on a number of fronts to
thwart terrorism, including strengthening border security, sharing intelligence and expanding law
enforcement cooperation. The Canadian government passed a new anti-terrorism act, and Canada
has contributed significant military assets to the NATO-led coalition in Afghanistan.
Paul Martin, who became prime minister in December 2003, met several times with President
Bush. At the January 2004 Summit of the Americas, the two leaders discussed several topics and
came to agreement on Canadian eligibility to bid on reconstruction contracts in Iraq and on the
ground rules for U.S. deportation of Canadian citizens. In April 2004 in Washington, DC, Martin
and Bush met once more and talked about a variety of issues, from terrorism to the “mad cow”
1 Prepared by Carl Ek, Specialist in International Relations; and Ian F. Fergusson, Specialist in International Trade and
Finance, Foreign Affairs, Defense, and Trade Division.
2 “Canada Narrows Its Foreign Policy Goals to Focus on Trade.” By Charles Trueheart. Washington Post.
November 17, 1994. p. A44. “Don’t Take Canada For Granted.” By Tad Szulc. Parade Magazine. February 20, 1994.
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crisis. In November 2004, during President Bush’s first official visit to Canada, missile defense,
border security, and global “hot spots” were on the agenda. Although bilateral tensions heated up
in 2005 over the issues of missile defense and softwood lumber, Canada’s government and private
citizens responded promptly and generously to assist the United States after hurricane Katrina.3
In February 2006, after a come-from-behind election victory, the Conservative Party assumed
power as a minority government, and Stephen Harper became Canada’s 22nd Prime Minister, the
first Conservative to lead the country in 12 years. Observers believed that Harper’s government
was somewhat more politically compatible with the Bush Administration in many areas.
However, although the policy orientation of Harper’s Conservatives may be similar to that of the
Republicans in Washington, differences still arose on certain issues, particularly those that
touched upon matters of perceived sovereignty. For example, on January 26, 2006, days before
his inauguration, Harper sharply took exception to comments made earlier by U.S. Ambassador to
Canada David Wilkins and asserted Canada’s sovereignty over the so-called Northwest Passage,
the frozen arctic region that global warming may turn into a waterway linking Asia and Europe.4
The election of Barack Obama in November 2008 signaled a new chapter in U.S.-Canada
relations. Unlike President Bush, Obama has been quite popular in Canada—a January 2009
public opinion poll put the new American president’s approval rating in Canada at 86%. Some
believe that this favorable view may be facilitating the Harper government’s cooperative efforts
with the United States. In addition, although Harper has a somewhat more conservative
orientation than Obama, both leaders are pragmatic in their approach to solving public policy
problems, and observers believe the bilateral relationship will continue to be collaborative and
productive. On February 19, 2009, renewing a tradition broken in 2001 by President Bush,
Obama made Canada his first official foreign visit. He and Harper focused on trade, climate
change, and Afghanistan, among other issues; in September 2009, Harper met with Obama at the
White House. Polls conducted in September 2009 and January 2010 showed that Obama enjoyed
continued popularity among Canadians.5
Canada’s Domestic Scene
Background and Current Political Situation
The Liberal Party, in power since 1993, was by 2003 being commonly referred to as “Canada’s
natural ruling party.”6 Maintaining a Liberal majority appeared to be a safe bet at that time, but in
February 2004 the “sponsorship scandal” erupted. Canada’s Auditor General issued a report
stating that, under a program intended to build support for Canadian unity, the Chrétien
government had funneled C$100 million in public funds for dubious contracts to Québec
advertising firms associated with the Liberal party.7
3 “Bush Launches Bid To Repair US-Canada Ties.” Agence France-Presse. November 30, 2004.
4 “Harper Tells U.S. To Butt Out On Plans For Defending Canada’s Arctic.” The Canadian Press. January 26, 2006.
5 “Obama Makes Overtures to Canada Prime Minister.” New York Times. February 20, 2009. “Obama’s Popularity
Higher Than Ever In Canada: Poll.” National Post. September 20, 2009. “U.S. President Still Rocks Canada.” Toronto
Star. January 28, 2010.
6 “Welcome to Their Nightmare: Finally, a Reason To Start Paying Attention To Politics Once Again.” Globe and
Mail. December 8, 2003.
7 “Canada: Martin on the Ropes in Funding Scandal.” Oxford Analytica. February 25, 2004. February 23, 2004.
(continued...)
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The Liberals’ standing in the polls plummeted, and the opposition strengthened. To the right of
the Liberals, two conservative parties had merged under a new leader, Albertan Stephen Harper.
And to the left, the New Democratic Party (NDP) likewise had recently elected a dynamic party
chief, Jack Layton.
In June 2004 elections, the Liberals, despite losing seats in the House of Commons, won a
plurality and formed a minority government. In November 2005, the Liberals lost a confidence
vote, and snap elections were held on January 23, 2006. This time, the Conservatives won a
plurality, and have been governing since then as a minority. Some analysts cautioned that the Tory
victory did not necessarily represent a “paradigm shift” to the right in Canadian politics; they
noted that the Conservative party won only 37% of the popular vote. Because past minority
governments have been relatively short-lived, Harper has been keeping one eye on the next
elections. In addition, Harper has relied upon the ad hoc support of the other three parties to
ensure passage of the various items on his legislative agenda. Many believe that is why he has
advocated fairly centrist policies.8
However, Harper has been willing to challenge public opinion over Afghanistan, where the
Liberal government deployed troops in 2002. In 2006, he won a narrow vote in parliament to
keep Canadian troops in Afghanistan for two additional years. Harper initially characterized the
mission as humanitarian in nature and also asserted that it was in Canada’s national interest to
demonstrate its ability to play a leadership role internationally. But as Canadian operations shifted
from peacekeeping to counter-insurgency and casualties mounted, public support diminished.
Canadian troops are now scheduled to be withdrawn by the end of 2011.
Canada’s most recent elections, held on October 14, 2008, did little to change the makeup of
parliament. The Conservatives, who reportedly anticipated a weakening in future support, called
the elections in hopes of capturing a majority. However, the Tories emerged only with a
somewhat stronger plurality—still short of a majority. Of the 308 seats in parliament, the
Conservatives currently hold 144, the Liberals 77, the BQ 48, and the NDP 36, with two
independents and one vacancy.9 Canada has now had three minority governments in a row.
In November 2008, a budget bill put forward by the Conservatives precipitated a political crisis;
the spending plan proposed, among other things, the elimination of federal funding for political
parties. The opposition parties, which would have been severely affected by the plan, rebelled and
were poised to vote down the government—ostensibly because Harper had failed to put forward a
stimulus package that would respond to the economic downturn. Harper withdrew his proposals
and, to avoid the no-confidence motion, prorogued (suspended or recessed) the session of
parliament until January 2009; the shutdown was sharply criticized by many.10
(...continued)
“Canada’s Premier Acts to Counter Scandal.” By DeNeen L. Brown. Washington Post. February 17, 2004.
8 “Interview: Stephen Harper.” Maclean’s. March 6, 2006. “Conservatives To Govern From Political Center.” Oxford
Analytica. January 24, 2006. “Harper’s Five Easy Pieces.” Economist. April 8, 2006.
9 Canada: An Early Appointment With Electoral Destiny. The Economist. September 6, 2008. Data from Canadian
Parliament’s website, updated April 30, 2010: http://www.parl.gc.ca/information/about/process/house/partystandings/
standings-e.htm
10 “Canadian Leader Shuts Parliament To Avoid No-Confidence Vote, Angering Many.” New York Times. December 6,
2008.
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During this time, the Liberal party named public intellectual Michael Ignatieff as their new leader.
Some believed that when Parliament returned in January, he would seek to bring down the
government and force new elections. However, he declined to do so, reportedly choosing instead
to support the government’s stimulus program (see below) and to consolidate the party’s strength
rather than challenge the Conservatives immediately.11
In the fall of 2009, many believed the Harper government might face a no-confidence vote,
particularly when public criticism was touched off by questions over how forthcoming the
government had been during inquiries over official knowledge about the turnover by the
Canadian military to Afghan authorities of prisoners who were subsequently tortured. On
December 30, 2009, Harper prorogued parliament until early March. Harper’s spokesperson
explained the move as one necessary to give the government the time to “recalibrate” and
“consult” over its budgetary policies and the upcoming Throne Speech—similar to the State of
the Union speech in the United States. However, other observers argued that Harper sent the
legislature home in order to avoid confrontation over the detainee controversy. The second
prorogation in roughly a year’s time prompted harsh criticism by the opposition parties, as well as
scattered protests around the country.
However, an uptick in the economy has helped Harper, whose party also benefited from a
“bounce” from the success of the Vancouver Winter Olympics. In addition, the government’s
handling of aid to Haiti in the wake of the January 2010 earthquake earned praise. On the
negative side of the ledger, Harper has been faulted for two seemingly unnecessary prorogations,
and also for not carrying out the institutional changes (including reform of the Senate and of the
electoral process) that he promised during his late 2005 campaign and early in his tenure.
In recent months, Canada’s political scene has been somewhat static. Polls consistently show both
parties falling short of the 40% approval rating deemed necessary to win a majority of seats in
parliament. Observers suggest that the smaller parties have siphoned off support, denying the
Conservatives the ability to win a majority or the Liberals a plurality. The Conservatives suffered
a summer slide in popularity, which appears to have had at least two causes. Although the G8 and
G20 summits, hosted in late June by Canada, lent international prestige to Ottawa, on the
domestic front critics raised questions about the management of the events and about security
costs. And in July 2010, a controversy erupted when the Harper government, maintaining that
parts of the national census were too intrusive, announced that completion of the “long-form”
questionnaire would be voluntary rather than mandatory, as it had been in the past. Critics,
including the head of Statistics Canada, who resigned in protest, charged that the change would
result in inaccurate data. Public opinion surveys in August showed the two largest parties neck-
and-neck.
Nonetheless, analysts believe that the political stalemate may permit the Harper government to
serve until the next general federal elections, which are set for October 2012. The Liberals, it is
believed, are unlikely to provoke a no-confidence vote unless polls show them to be within
striking distance of winning. In addition, many argue that Canadians are weary of elections; at
59.1%, turnout for the last vote was the lowest in history. Voter participation may therefore play a
key role in the next election.12
11 “The Liberals Try a New Leader,” The Economist, December 13, 2008.
12 “Harper Goes Prorogue.” The Economist. January 9, 2010. “Improved Poll Numbers Not Enough To Entice Ignatieff
Into Spring Election.” Canadian Press. January 28, 2010. “Conservatives Secure 10-Point Lead: Poll.” National Post.
(continued...)
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National Unity
For four decades, an emotional debate has raged over the status of French-speaking Québec,
Canada’s second largest province geographically and home to about one-quarter of its population.
Many Québécois are concerned that their language and culture will be overwhelmed by the rest of
English-speaking Canada. Some believe that their society may only be preserved if Québec
separates from the rest of Canada and forms an independent country. A 1980 referendum on
“sovereignty-association” for Québec was defeated 60%-40%.
In October 1994 elections, after the provincial Liberals had governed Québec for several years,
the province once more elected the separatist Parti Québécois (PQ). The victorious PQ held a
referendum on sovereignty on October 30, 1995. Québeckers essentially voted on whether they
wished to continue to remain a part of Canada, or strike off on their own. The vote went 50.6% to
49.4% in favor of keeping the country whole. The wafer-thin margin shocked federalists and
separatists alike. More than a decade later, the country is still affected by the impact of what has
been called a “near-death experience.”
In 2003, Québec voters turned out the PQ and replaced them with the Liberals, led by Jean
Charest. A former leader of the Progressive Conservatives at the national level, Charest is a
committed federalist, which rules out another sovereignty referendum during his tenure. In the
early part of his first term, Charest lost popularity when he attempted to reduce the economic role
of the provincial government; those efforts prompted strong protests from the powerful public
service unions. Some Québec-watchers assert that Charest learned from this experience and
changed his tactics. In elections held in 2007 and 2008, the Liberals won a plurality, and a
majority, respectively; Charest has retained his spot as premier.
Since the debate began in the 1960s, the United States government has assiduously sought to
remain officially neutral on the issue of Québec, continually repeating the three-point “mantra”
that the United States enjoys excellent relations with a strong and united Canada; that the Québec
question is an internal issue that is for Canadians to decide; and that the United States does not
wish to interfere with Canada’s domestic matters. However, some analysts detected a slight “tilt”
on the part of Clinton Administration toward the federalists during the 1995 referendum
campaign. If, at some future date, Québec eventually does leave the confederation, the U.S.
government will be faced with difficult political and economic questions.
Foreign and Security Policy Issues
As a middle power, Canada has exercised a somewhat disproportionate influence in world affairs,
chiefly through its active participation in international organizations, including the G-8, G-20,
and the Asia-Pacific Economic Cooperation forum. From 1998 to 2006, Canadian diplomat
Louise Frechette served as Deputy Secretary General of the United Nations, and from 1996 to
2006 Canadian Donald Johnston was Secretary General of the Organization for Economic
Cooperation and Development. The president of the International Criminal Court from 2003 to
2009 was Judge Philippe Kirsch from Canada. The first head of the U.N. War Crimes Tribunal
(...continued)
April 12, 2010. “Stalled Institutional Reform Hurts Harper.” Oxford Analytica. March 9, 2010. “Stimulus Has Boosted
Growth, Harper.” Oxford Analytica. April 14, 2010. Canada Politics: Speculation About Election Ebbs. EIU Viewswire.
April 19, 2010.
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was Canadian Louise Arbour. In June 2005, Canadian Air Force General Ray Henault was named
head of NATO’s military committee, a post he held until 2008.
Canadians are proud of the active role played by their military as international peacekeepers.
Since the United Nations first dispatched an armed peacekeeping contingent to help defuse the
Suez Crisis in 1956, Canada has participated in nearly every U.N. peacekeeping operation, from
Cyprus and the Sinai, to Bosnia, Rwanda, Somalia, and Afghanistan. As of April 2010, over 2,900
Canadian Forces personnel were participating in international operations in Afghanistan, the
Middle East, and Africa.13
As with other countries in the 1990s, Canada’s military was subject to dual pressures. In Ottawa’s
view, the collapse of the Soviet Union and the Warsaw Pact reduced the military threat, making it
more difficult for the government to justify sustaining historic spending levels on defense.
Leaders believed that the country’s large debt early in the decade necessitated funding cutbacks in
most areas of government, including defense. However, relative to its NATO allies, Canada had
devoted only a modest share, about 2% of GDP, of its budget to defense spending during the
1980s and 1990s. That percentage declined even further, from 2.01% in 1990 to 1.1% in 2005;
among the 26 NATO members, only Luxembourg and Iceland (which has no armed forces) spent
a lower percentage. Canada’s meager military budget irked some within the alliance, particularly
the United States.14
After the round of cutbacks in the 1990s, the number of active personnel in Canada’s armed
forces tumbled from 87,000 in 1989 to 52,000 in 2004, the 56th largest in the world. The Canadian
forces also were strapped for resources to replace aging equipment. This trend disturbed many,
and there were numerous warnings published. In March 2002, a Canadian Senate committee
called for increased defense spending to counter the threat of international terrorism; it also
recommended that personnel levels be increased and that more resources be provided to the
Canadian Security Intelligence Service. A November 2002 Senate report recommended boosting
troop levels to 75,000 and restructuring the armed forces. A brace of studies in the fall of 2003
likewise called for changes in force restructure and procurement practices and for increases in
manpower and budgets. A news report characterized one of the studies as concluding that
“Canadian Forces are teetering on the edge of irrelevance.” In September 2005 the Senate
published yet another report, which called for a doubling of spending on defense.15
Recent Canadian governments appear to have heeded these messages. As of April 2010, there
were approximately 66,000 regular force members and 34,000 reserves. In addition, Canada’s
defense spending has been trending upward. The budget tabled in February 2005 contained the
largest military spending increase in two decades: C$12.8 billion—roughly equal to the entire
2005 military budget—spread over five years. The Harper government’s first budget added C$5.4
billion in military spending over the next four years. The 2007 budget confirmed the previous
year’s spending increase, and the 2008 budget sought to ensure continuity through the Canada
First Defence Strategy, which will provide for yearly increases of 2% beginning in 2011-2012.
13 Canada and International Peacekeeping. By Joseph T. Jockel. Center for Strategic and International
Studies/Canadian Institute of Strategic Studies. Washington, DC, 1994. Current Operations. Canadian Expeditionary
Force Command website. Updated May 5, 2010. http://www.cefcom.forces.gc.ca/pa-ap/ops/index-eng.asp.
14 “Spend More On Military, U.S. Envoy Urges Ottawa.” Toronto Star. February 25, 2004.
15 “Armed Forces Hobbled, Report Says.” By Daniel LeBlanc. Globe and Mail. December 3, 2003. “Senators Sounding
Alarm On Defence.” The Gazette. October 3, 2005.
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The government budget for the armed forces in 2008-2012 will average around C$20 billion
annually.16
U.S.-Canada Security and Foreign Policy Issues
According to the U.S. State Department, “U.S. defense arrangements with Canada are more
extensive than with any other country.” Former Canadian Ambassador Michael Kergin referred to
the defense relationship as being “intermestic” in nature.17
Over the past century, U.S.-Canadian defense cooperation has been close. In 1940, President
Franklin D. Roosevelt and Prime Minister McKenzie King established the Permanent Joint Board
on Defense, which formalized bilateral consultation on military matters and is still in operation.
In 1949, the two countries were founding members of NATO. During peacetime, military
cooperation has occurred chiefly in the context of bi- and multinational organizations.
NORAD
In 1958, Canada and the United States signed the North American Aerospace Defense Command
(NORAD) agreement. The continental air defense pact monitors U.S. and Canadian airspace and
encourages joint efforts in aerospace technologies. In the wake of the September 11 terrorist
attacks, there were discussions of deepening military cooperation along the NORAD model, in
the context of the newly created U.S. Northern Command, to include land and sea forces. But
some Canadians were concerned that such a move might impinge upon Canada’s sovereignty, and
in August 2002, the Canadian government announced that its land and sea forces would not be
participating in the command. In December 2002, however, the two countries signed a new
accord creating a binational planning group (BPG) based at NORAD to coordinate responses to
terrorist attacks and other crises. The BPG issued its final report in March 2006; the panel put
forward numerous recommendations, including that the two countries develop a common security
vision and improve interoperability through joint military planning, training, exercises, and
information sharing. In August 2004, Canada and the United States amended NORAD to permit it
to share information on incoming ballistic missiles. Ottawa and Washington also agreed to
expand the scope of the agreement to encompass nautical surveillance.
On February 14, 2008, the commanding generals of U.S. Northern Command and of its Canadian
counterpart, Canada Command, signed a binational Civil Assistance Plan. Under the plan, the
armed forces of each country, after appropriate consultation with civilian authorities on both sides
of the border, may come to the support of the other country’s military in the event of civil
emergencies such as floods, earthquakes, or the effects of a terrorist attack. In November 2009,
NORAD launched a review of possible threats and of binational air defense capabilities.18
16 The Military Balance, 2010. International Institute for Strategic Studies. Defence and Budget 2005—Highlights.
DND website. http://www.forces.gc.ca/site/reports/budget05/summ05_e.asp.
17 United States Department of State. Bureau of Western Hemisphere Affairs. Background Note: Canada. February
2010. “Remarks to the Center for Strategic and International Studies.” February 28, 2005.
18 “Continental Divides.” By Sydney J. Freedberg, Jr. National Journal. March 23, 2002. “Leading academics Examine
Risks Inherent In Closer Military Co-operation With the United States.” Canada NewsWire. April 26, 2002. “Canada
Won’t Join Norad-Like Land-Sea Force. By Rick Mofina.” Ottawa Citizen. August 15, 2002. September 12, 2005.
Binational Planning Group. Final Report. March 13, 2006. http://www.canadianally.com/BPGFinalReport.pdf U.S.
Northern Command website: http://www.northcom.mil/news/2008/021408.html Canada, U.S. Set To Review Air
(continued...)
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Missile Defense
Ottawa long debated whether it should participate in the U.S. missile defense (MD) system. Some
analysts expressed reservations over the plan, in the belief that it might spark a new arms race,
while others reportedly preferred to keep Canada’s options open. Parliament held hearings on the
issue, but no official policy was enunciated. Finally, in May 2003, Canada said that it would enter
into discussions with the United States; a Canadian military affairs journalist described Canada’s
likely negotiating goals: “Canada wants the anti-missile shield run by NORAD—in effect, giving
Canada equal status in protecting North America and a finger on the trigger. Ottawa wants a share
of the industrial benefits and access to secret technologies, all while paying little or nothing. And
it continues to insist that space not be weaponized.”19
On February 24, 2005, the Canadian government said that it would not participate in MD.
However, Canada’s ambassador to the United States had pointed out earlier that the two countries
had already agreed to allow NORAD to share information with U.S. MD commands. U.S.
officials expressed puzzlement and disappointment with the announcement, noting that Canada
had sent signals that it would likely sign on. Polls showed that a majority of Canadians,
particularly Québeckers, opposed MD, leading some analysts to suggest that domestic political
pressures may have guided the decision. In late February 2006, Canada’s Defense Minister said
that the Harper government likely would review the missile defense issue if asked to do so by
Washington. Any final decision on participation, he added, would be subject to a parliamentary
vote. In April 2008, U.S. Air Force General Gene Renuart, head of NORAD, was quoted as
having said that all incoming intelligence concerning missile threats was shared with Canada.20
Joint Strike Fighter
In February 2002, Canada agreed to participate in the further development of the U.S.-led
multinational Joint Strike Fighter (JSF, or F-35) program, contributing $150 million over a 10-
year period. In December 2006, it was announced that the Canadian government had committed
an additional C$500 million for the development of the aircraft. Canada has reportedly agreed to
consider purchasing the new fighters to replace its own fleet of CF-18 planes when they are
retired in 2017, and has earmarked nearly C$4 billion for the new planes. In June 2007, the
Department of National Defense announced plans to form a new office to evaluate Canada’s
future air defense requirements. Canada appears to be reaping rewards from its participation; as
of June 2007, Canadian firms had won 150 JSF contracts worth about $160 million. In addition,
Canadian defense companies stand to benefit from the Pentagon’s plans to purchase additional F-
35s. In July 2010, Defense Minister MacKay confirmed that the government planned to spend
C$9 billion on the acquisition of 65 F-35 aircraft. The opposition Liberals criticized the decision,
arguing that it should have been reviewed by parliament first, while the New Democrats
maintained that the radar-evading F-35 may be more airplane than Canada needs. 21
(...continued)
Defence Capabilities. Ottawa Citizen. November 26, 2009.
19 “Shoot Down Defence Dreamers.” By Paul Koring. Globe and Mail. June 25, 2003.
20 “Canada and the U.S. Missile Defense System.” Dwight M. Mason. CSIS Hemisphere Focus. January 9, 2004.
“Martin and the Politics of Missile Defense.” Globe and Mail. May 1, 2004. “Martin’s Move Irritates U.S.” By Sean
Gordon. Toronto Star. February 24, 2005. “Minister Backs U.S. Missile Plan.” Toronto Star. February 24, 2006.
“Canada Kept In Loop At NORAD About All Missile Threats.” Ottawa Citizen. April 10, 2008.
21 “Canadian Firms Big Winners In U.S. Jet Project.” National Post. April 21, 2006. “Canada Commits Up To $500
(continued...)
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NATO
Canada has been engaged in the debate over NATO’s future. It supported the 1999 and 2004
rounds of enlargement and announced that it would participate in the NATO Response Force,
which the alliance agreed to at its November 2002 Prague summit. At the April 2008 Bucharest
summit, Canada endorsed the addition of Croatia, Albania, and Macedonia; in addition it
supported the proposal to offer Membership Action Plans to Georgia and Ukraine. Finally, as
noted above, Ottawa has maintained troops in Afghanistan since 2002, and its military leaders
have served in a command capacity. In April 2003, then Foreign Minister Graham, along with the
Dutch and German governments, requested that NATO take over command of ISAF.22 In a 2009
speech in the UK, Canadian Defense Minister Peter MacKay cautioned that NATO was being
tested in the crucible of Afghanistan, and urged more equitable burden sharing.23
Although it has no troops stationed in NATO territory in Europe, Canada in recent years
contributed several hundred troops to the NATO-led Stabilization Force (SFOR) in the Balkans.
Canada also supplied 200 troops to NATO’s mission in Macedonia. Canada cooperated “wing-to-
wing” with the United States in Operation Allied Force, the NATO campaign of air strikes against
targets in Serbia and Kosovo, contributing 18 CF-18 fighter aircraft and providing two rotations
of approximately 1,500 troops each to KFOR. In addition Canada has supported non-NATO
peacekeeping operations; it has provided 600 to the initial U.N. peacekeeping mission in East
Timor and has also sent 500 troops to maintain stability in Haiti.24
Afghanistan
Canada was one of the first countries to join the military operation in Afghanistan; its
participation dates back to October, 2001. Along with British, Dutch, Danish and U.S. troops,
Canadian forces have been serving on the front line in the combat operations to counter attacks by
al Qaeda and Taliban fighters. Canada has been maintaining approximately 2,800 troops in the
country. A total of 152 Canadians, including one diplomat, have died in Afghanistan. In 2005,
Canada launched a Provincial Reconstruction Team mission in Kandahar. Ottawa also has
provided humanitarian and reconstruction assistance to Afghanistan. Canada is among the top
five donors to the country, and has pledged C$1.9 billion through 2011 in reconstruction and
development assistance.25 As noted above, Canada intends to remove its troops by 2011.
(...continued)
Million to the Development of CF-18 Replacement.” The Canadian Press. December 13, 2006. “New Office To Assess
Canada’s Fighter Needs.” Defense News. June 18, 2007. Forces Tag $3.8B To Buy Advanced Jets. Ottawa Citizen.
June 27, 2007. Canada To Gain From U.S. Defense Budget. National Post. April 8, 2009. U.S. Denies Canada Info
Needed To Maintain Jets. Ottawa Citizen. November 25, 2009. “Canada’s Defense Chief Rejects Criticism of F-35
Jet,” New York Times. July 17, 2010.
22 “NATO Umbrella Sought.” By Allan Thompson. Toronto Star. April 4, 2003. “NATO Sees Key Role For Canada In
Afghan Security.” Reuters. May 6, 2003. CRS interview of Canadian government official, May 7, 2008.
23 NATO’s Future At Stake In Afghanistan: MacKay. Ottawa Citizen. February 16, 2009.
24 Current Operations. Canadian Expeditionary Force Command website. Updated April, 2009. http://www.comfec-
cefcom.forces.gc.ca/pa-ap/ops/index-eng.asp
25 DND website: http://www.forces.gc.ca/site/newsroom/view_news_e.asp?id=1703. “Canadian Development
Assistance In Afghanistan: Current Projects.” Government of Canada website. January 31, 2008. http://www.canada-
afghanistan.gc.ca/cip-pic/afghanistan/library/afgh_security-en.asp
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Haiti
Canada and the United States have worked closely together over the past sixteen years with the
U.N. mission in Haiti, where a contingent of the Canadian armed forces, along with members of
the Royal Canadian Mounted Police, took the reins from departing U.S. forces who had helped
restore the democratically elected government in Haiti in 1994. In 2004, after the Aristide
government stepped down in the face of armed rebellion, Canada joined the United States and
France in providing peacekeepers to the U.N.-authorized Multinational Interim Force sent to the
troubled island; Canada dispatched helicopters and nearly 500 troops. In February 2008, then-
Canadian Foreign Minister Bernier traveled to the island nation, where he announced that
Ottawa’s total multiyear aid package would be raised to C$555 million. In the wake of the turmoil
over food shortages, he called for international donors to harmonize their assistance during an
April 2008 donor conference. Haiti is the second-largest recipient (after Afghanistan) of Canadian
development assistance. Canada’s Governor General, Michaëlle Jean, who was born in Haiti,
traveled to the island in January 2009; she visited several development projects, and met with
government and civil society leaders. Jean returned to visit following the January 12, 2010,
earthquake that devastated the country. At an international donor conference held at the United
Nations on March 31, Canada made a two-year pledge of C$400 million in humanitarian and
reconstruction assistance, making it the largest per capita provider of aid to Haiti.26
Iraq
Canada was disinclined to expand the so-called war on terrorism beyond Afghanistan to Iraq. In
September 2002, during a meeting in Detroit with President Bush, Chrétien reaffirmed Canada’s
preference for a U.N. mandate, a stance that strongly reflected Canadian public opinion.
Washington later requested of Ottawa specific military commitments in the event of a conflict
with Iraq, but no definitive answer was given. Over the following months, the government’s
statements on Iraq were characterized by the media as imprecise and at times contradictory, an
apparent attempt to keep options open. But in the House of Commons on March 18 2003,
Chrétien stated unequivocally that “Canada will not participate.” The Bush Administration
expressed disappointment with the decision. 27
Washington subsequently requested that Canada assist in the reconstruction of Iraq by sending
troops or military police. Ottawa responded by offering 150 members of its Disaster Assistance
Response Team, a non-traditional military unit consisting of security, engineering, and medical
personnel. Canada also provided funding in a number of areas, including humanitarian and
reconstruction aid, support for elections, and police training. The Canadian International
Development Agency pledged C$300 million (2003-2010) in assistance to Iraq. In January 2004,
Canada announced that it would cancel Iraq’s $564 million debt.28
26 “Canada Pledges $555 Million In Aid To Haiti.” Reuters. February 24, 2008. Canada Participates In Harmonization
Efforts In Haiti. News Release. Foreign Affairs and International Trade Canada. April 23, 2008. ‘I Can Feel the
Strength of the People,’ Jean Says. National Post. March 30, 2010. Canada Pledges $400 million To Haiti. Ottawa
Citizen. April 1, 2010. Canada’s Role In Haiti. Globe and Mail. April 3, 2010.
27 “Well, Maybe ... .” Economist. September 28, 2002. “PM Scolds McCallum On Canada’s Role In Iraq.” By Shawn
McCarthy and Daniel Leblanc. Globe and Mail. January 16, 2003. “Bravos Greet Chrétien.” By Tim Harper. Toronto
Star. March 18, 2003.
28 “Iraq: Canada’s Commitment.” Canadian International Development Agency web page: http://www.acdi-cida.gc.ca/
iraq#1 Updated May 24, 2007.
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Cuba
Cuba has been another issue where the two countries have not always seen eye-to-eye. For
decades, Canada has maintained normal diplomatic relations with Cuba, and has maintained
relatively extensive business links: Canada is Cuba’s third-largest trading partner and its number
one source of tourists. Because of this ongoing commercial relationship, Canadian government
officials publicly criticized a U.S. law (the Cuban Liberty and Democratic Solidarity Act, P.L.
104-114) that seeks to apply indirect pressure on the Castro regime by permitting Cuban-
Americans to file lawsuits against foreign firms that use Cuban property that was expropriated by
the Castro regime. U.S. supporters of the Cuba embargo have been critical of Canadian mining
companies and hotel chains that do business with the island nation. Canadians, who are sensitive
to being perceived as America’s “junior partner,” object that the law amounts to the United States
forcing its foreign and commercial policies upon other countries. In 2003, after the Castro
government handed down Draconian prison terms to 75 political dissidents, Ottawa expressed
official disapproval. The transfer of Cuba’s presidency from Fidel to Raul (temporary in 2006,
permanent in 2008) prompted vigorous debate in the Canadian press over what policy Ottawa
should adopt toward Cuba.29 In April 2009, the Obama Administration announced that it would
ease restrictions on family travel and remittances to Cuba and allow greater telecommunications
links with Cuba. The decision was welcomed by Ottawa; Peter Kent, Minister of State of Foreign
Affairs for the Americas, commented that “the election of the Obama Administration has given
real momentum to the sort of change that Canada has been encouraging for a long time.” A
planned trip by Kent to Havana in May 2009 was cancelled, reportedly because Kent had said
that he planned to address the human rights issue during his trip, and because Prime Minister
Harper had referred to himself as an “anti-communist conservative.” The trip was re-scheduled,
and Kent traveled to Cuba later in the year. In mid-2010, relations were strained over the case of a
teenaged Canadian traveler detained for three months in Cuba. The 19-year-old, who suffered
injuries when the vehicle he was driving was sideswiped by a pickup truck, was held by Cuban
authorities under threat of a jail sentence. He was allowed to return in early August. 30
International Criminal Court
The International Criminal Court (ICC) is another issue on which the two countries differ. Canada
has long been a leading advocate of the U.N.-sponsored tribunal, while some U.S. policymakers
have opposed U.S. participation on the grounds that it might make U.S. military personnel
vulnerable to politically motivated prosecution by hostile regimes. In May 2002, the Bush
Administration declared that the United States would not support the ICC; the same day, then-
Canadian Foreign Minister Bill Graham declared that he was “extremely disappointed” with the
U.S. decision. In a U.N. speech four months later, Graham faulted the United States “for its ‘ad
hoc and unilateral pursuit’ of the prosecution of crimes against humanity.”31
29 See, for example: “Castro’s Resignation Unlikely To Change Canadian-Cuban Relations, Experts Say.” The
Canadian Press. February 19, 2008. “Don’t Support Castro’s Island Prison.” National Post. February 19, 2008. “With
Fidel Castro Gone, U.S. Hawks Will Look North.” Toronto Star. February 20, 2008. “The Autumn Of the Patriarch.”
Ottawa Citizen. February 23, 2008.
30 “Unreformed Tyranny.” Globe and Mail. November 23, 2009. “Cuba To Give Canada Expanded Air Access With
Island To Boost Tourism.” Canadian Press. January 15, 2010. “Cuba’s Tainted Image,” Toronto Star. August 4, 2010.
31 “Canada Raps U.S. Rejection Of World Criminal Court.” By David Ljunggren. Reuters. May 6, 2002. “U.S. Rift
With Allies On World Court Widens.” By Julia Preston. New York Times. September 10, 2002.
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Border Security
In the wake of the attacks on New York and Washington, U.S.-Canadian relations came to the
fore. In particular, the issue of U.S.-Canada border security was brought into sharp focus. The
issue first became a matter of urgent concern in December 1999, when U.S. border officials,
acting on a tip from Canadian authorities, stopped Ahmed Ressam at the U.S.-Canadian border as
he was attempting to smuggle explosives into the United States; it was later discovered that
Ressam had planned to bomb the Los Angeles airport, and that he had received terrorist training
from Al-Qaeda in Afghanistan.
Despite the fact that none of the 19 September 11 highjackers entered from Canada, the attacks
sparked renewed debate over Canadian laws regarding the treatment of immigrants seeking
refugee status or political asylum.32 By February 2002, Ottawa had already made “steps to tighten
immigration and refugee policies, including more rigorous screening of people who claim refugee
status and stepped up detentions and deportations of claimants suspected of being security
risks.”33
Some American policymakers pointed to the Ressam case as proof that the United States must
tighten its borders with Canada. Skeptics, however, note that such measures might seriously
impede commerce by creating long delays at border crossings, and that determined terrorists and
criminals would at best be inconvenienced, not stopped, in traversing the two countries’ 5,500-
mile border. About 70% of U.S.-Canada merchandise trade crosses the border by truck; many of
these shipments are “just-in-time” deliveries; their delay at border crossings can seriously disrupt
manufacturing in the United States and Canada.34 Both sides have strong incentives to strengthen
security but keep goods flowing.
Since the September 11, 2001, attacks, Ottawa and Washington have taken numerous steps,
separately and jointly, to improve border control. In December 2001, they signed the Smart
Border declaration that aims at improving security and efficiency at border crossings; the
agreement lays out a 30-point (since increased to 32-point) list of areas of joint activity, ranging
from pre-clearance of goods (the FAST program) and people (NEXUS), to biometric identifiers,
to infrastructure improvements. The cooperation covers crossings by air, land, and sea traffic. In
December 2002, the two nations signed the Safe Third Country agreement, intended to permit
coordination of refugee and asylum policy.
The Western Hemisphere Travel Initiative (WHTI), a provision of a 2004 U.S. law requiring
travelers passing between the two countries to present a passport, a NEXUS card, or an
equivalent secure, approved document, at the border came into effect on June 1, 2009. The
Department of Homeland Security (DHS) has been working with the Canadian government to
develop an alternative document that is secure, inexpensive, and would be carried anyway—for
example, a driver’s license containing enhanced biometric information. Currently, such enhanced
licenses are being issued by the provinces of British Columbia, Manitoba, Ontario, and Québec,
and by the states of Michigan, New York, Vermont, and Washington. Although comprehensive
32 In April 2009, U.S. Department of Homeland Security Secretary Janet Napolitano raised concerns when she averred
that some of the 9/11 terrorists and crossed over from Canada. “Napolitano’s Comments About Canada’s Border Spark
Diplomatic Kerfuffle.” The Canadian Press. April 21, 2009.
33 “Al-Qaida In Canada?” CBSNEWS.com. April 25, 2002. “Canada Alters Security Policy To Ease Concerns of U.S.”
By Clifford Krauss. New York Times. February 18, 2002.
34 “Delays at the Canadian Border Eat Up Trade.” By John Stark. AP. February 1, 2003.
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travel data for 2009 is not yet available, anecdotally, single-day trips by U.S. residents to Canada
appear to be the most adversely affected by the new regulations.35
Canada’s custom service stepped up the purchase of high-tech X-ray equipment, and U.S. and
Canadian customs agents are working together, inspecting containers at several Canadian and
U.S. seaports. Border security personnel levels have also been beefed up, and Integrated Border
Enforcement Teams have been established in high-priority regions. Canada also has set up an Air
Transport Security Authority, which, among other activities, is responsible for pre-board
screening.
In 2004, the Canadian government created a Department of Public Safety and Emergency
Preparedness, a counterpart to the U.S. Department of Security (DHS), and a Border Services
Agency. Recent Canadian federal budgets have contained new monies for security-related
priorities such as intelligence, maritime and cyber security, threat assessment, and emergency
response.
Canada has taken other actions beyond the realm of border security, including freezing terrorists’
assets, broadening the scope of terrorist activities punishable by law, extending police
investigative powers, introducing legislation that would put restraints on fund-raising activities by
extremist organizations, expanding cooperation between the FBI and the Royal Canadian
Mounted Police (RCMP), and increasing outlays for countering nuclear, biological, and chemical
weapons attacks.36
In early June 2006, Canadian police conducted a series of raids in the Toronto area, arresting 17
individuals. The arrests were made in accordance with the Anti-Terrorism Act passed late in 2001.
The group reportedly had discussed attacking several possible targets, including power plants, a
Canadian military base, the Toronto Stock Exchange, and other prominent sites. The plan
involved having some members of the group detonate truck bombs while another group
reportedly would storm the parliament and capture hostages. Prime Minister Harper was said to
have been a key target. Most of the 17 were in their teens or early 20s. All were either Canadian-
born or had immigrated to the country at an early age. The suspects had a variety of backgrounds;
some were students, some held jobs, and some were unemployed. Many were from middle class
backgrounds, and few of them had criminal records.
U.S. officials claimed that the arrests proved that Canada’s law enforcement and intelligence
services were doing an excellent job of ensuring security. An FBI spokesperson said there was
“no imminent threat” to the United States stemming from the Toronto operation. However, some
U.S. Members of Congress claimed that Canada maintains lax immigration and asylum policies,
and that the arrests demonstrated that stricter controls over the U.S.-Canada border are in order.
The incident prompted close consultations between U.S. and Canadian policymakers and law
enforcement officials. The operation has not arisen as a domestic political issue in Canada, but it
35 “U.S. Tourists Staying Away from Canada,” Bangor Daily News, April 6, 2010; International Association of
Amusement Parks and Attractions, “Rules of the Road,” April 2010, http://www.iaapa.org/industry/funworld/2010/apr/
features/RuleRoad/index.asp
36 For another brief overview of efforts to secure the U.S.-Canada border, see Joint Counter-Terrorism Initiatives. By
Melissa Radford. Border Facilitation: Products and People. By June Dewetering. Both in Canada and the United
States: Shared Interests and Concerns. Canadian Library of Parliament. January, 2009. http://www.parl.gc.ca/
information/library/PRBpubs/prb0834_00-e.htm
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has renewed debate about Canada’s immigration practices, its commitment to a multicultural
environment, its security measures, and the presence of its troops in Afghanistan.37
In a late August 2010 sting operation known as Project Samosa, the RCMP and the Canadian
Security and Intelligence Service (CSIS) seized bomb-making materials and arrested six men
suspected of conspiring to commit acts of terrorism and to transfer funds to insurgents in
Afghanistan. Authorities stated that the detainees, who were said to be mainly educated
professionals, are believed to have received training in Afghanistan or Pakistan. One of the
detainees was a contestant on the ‘Canadian Idol’ television show in 2008.38
Economic and Trade Issues
After several years of steady growth, Canada fell into recession in the fall of 2008. Canada’s GDP
dropped 2.6% in 2009, however, the Economist Intelligence Unit and IHS Global Insight expect
the economy to expand by 3.0% and 3.4%, respectively in 2010. Canada was hard-hit by the
weakening of the U.S. economy as the United States is by far the chief customer for export-
dependent Canada. Annual consumer price inflation barely registered at 0.3% in recessionary
2009 before returning to an annualized rate of 1.8% by July 2010. The unemployment rate, which
hit a generational low of 5.8% in January 2008, peaked at 8.7% in August 2009, before gradually
falling back to 8.0% by July 2010.39 In 2009, Canada recorded its first current account deficit in
nine years in the 4th quarter of 2008, and the collapse in trade led to a CA deficit of $36 billion for
2009 as a whole.
Budget Policy
Canada entered into recession in the 4th quarter of 2008. While Canada is heavily dependent on
the world economy, and thus easily affected by it, some Canadian policymakers believed that the
country was in a relatively better position to ride out the economic downturn. After all, Canada
had profited handsomely from the resources boom that only began to wind down the summer of
2008. Also, Canadians were reassured by its comparatively more regulated banking system,
which was able to avoid the worst excesses of the U.S. financial meltdown. However, Canada
could not long avoid the effects of the collapse of the U.S. housing market, the woes of the U.S.
automotive sector, and the seizing up of credit markets worldwide.
Canada’s Economic Action Plan
Following the reconvening of parliament in January 2009, the government introduced a C$258.6
billion budget, which called for C$40 billion in stimulus spending and tax cuts for FY2009-
FY2011. The stimulus consists of a package of income tax cuts, employment insurance (EI)
37 “Canada’s Terror Sweep Grabs Spotlight in U.S.” Canadian Press. June 3, 2006. “U.S. Praises Canada On Terror
Arrests But Critics Blast Immigration Laws.” Canadian Press. June 4, 2006. “Terrorists In Toronto: Is Canada Safe?
Are We?” By Tanya Primiani and Christopher Sands. CSIS Commentary. Center for Strategic and International Studies.
June 20, 2006. “The Toronto Terror Plot.” Economist. June 10, 2006.
38 “Third Terror Suspect was Canadian Idol Contestant,” Toronto Star, August 26, 2010; August 27, 2010. “Canada
Arrests Show Affluence Is No Bar To Militancy,” Oxford Analytica. August 27, 2010. “Few Details Given As 4
Canadians Are Held In Terrorist Plot,” New York Times. August 28, 2010.
39 Economic data are from Economist Intelligence Unit, wire service reports, and Statistics Canada.
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benefit extensions, job retraining, ‘hard’ infrastructure spending, tax credits for home renovation,
retrofits for social housing, and investments in First Nation’s health programs.40 In all, the C$40
billion represents a stimulus of about 1.5% of GDP in the first year and 1.1% in the second year.
Increased spending represents approximately 72% of this package and tax cuts contribute the
remaining 28%. The March 2010 budget allocated the remaining C$19 billion in stimulus.
The 2009 budget also marked a return to deficit spending for Canada after 12 successive budgets
in balance or surplus. The 2009 budget contemplated a deficit of C$34 billion the first year, and
predicted a total of C$81 billion in borrowing over five years before the budget is expected to
return to surplus in 2013. The March 2010 Budget revised upward the 2009 deficit to C$53.8
billion, proposed a C$49.2 billion deficit in 2010, and envisaged the budget returning to balance
in 2015 with a total C$158.4 billion increase in the national debt. The Harper Government plans
to return to budget balance by winding down the stimulus measures, targeted spending
reductions, and identification of additional opportunities for administrative savings. The
government has pledged not to raise taxes and not cut transfer payments to individuals or
equalization payments to the provinces. 41 Opposition leaders have expressed skepticism that the
budget could return to balance through economic growth and with the scope of spending cuts
envisioned in the budget.
The return to deficit spending, while acknowledged as necessary by most of the political
spectrum to combat the severe economic recession, was not undertaken lightly. Prior to the
‘austerity’ budget of 1995, Canada had racked up 27 straight years of deficit spending. At its peak
in 1996, Canada’s public debt represented 101.6% of GDP, and government sector spending
reached 53.6% of GDP in 1993. Realizing this course was unsustainable, the Liberal government
of then Prime Minister Jean Chrétien and his Finance Minister Paul Martin embarked on a
financial austerity plan using such politically risky measures as cutting federal funding for health
and education transfers, applying a means test to those eligible for Seniors Benefits, and cuts in
defense. A nationwide goods and services tax was introduced to help close the gap. Under this
budget discipline, the government submitted a balanced budget in 1998 and a political consensus
emerged not to resort to deficit spending, at least until 2009.
Energy
Canada is the United States’ largest supplier of energy—including oil, uranium, natural gas, and
electricity—and the energy relationship has been growing. Canada is the world’s seventh largest
petroleum producer, and its reserves are believed by some to be second only to those of Saudi
Arabia; Canada’s sources of oil include traditional and offshore wells and, increasingly, Alberta’s
oil sands. In 2009, the value of U.S. energy imports from Canada dropped precipitously from
$111.3 billion to $63.7 billion. While some of this drop reflected a recessionary decline in
demand, it can also be attributed to the marked drop in energy prices during the year. Canada
provides 24.5% of U.S. crude oil imports and supplies 31% of U.S. natural gas imports.42 Canada
is particularly valued because it is considered a reliable source of energy, as it is not a member of
OPEC. The two countries are also cooperating on the development of pipeline construction
projects. China has shown interest in Canada’s oil sector, and has recently bought stakes in the
40 “Tories to Aggressively Implement Budget Spending Measures,” The Hill Times, February 2, 2009.
41 “Budget 2010 in Brief” http://www.budget.gc.ca/2010/glance-apercu/brief-bref-eng.html
42 2009 statistics from U.S. International Trade Commission http://dataweb.usitc.gov
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Alberta’s oil sands projects. Canada also a net exporter of electricity to the United States, and the
North American electricity grid is closely interconnected. Following the August 2003 blackout,
the two sides have worked to develop improved standards for electricity transmission reliability.43
Bilateral Trade Issues
The United States and Canada enjoy the largest bilateral commercial relationship in the world;
total two-way cross-border trade amounted to over $1.2 billion per day in 2009. Over the past
twenty years, U.S.-Canada trade relations have been governed first by the 1989 U.S.-Canada Free
Trade Agreement and, subsequently, by the 1994 North American Free Trade Agreement. These
agreements, along with the conclusion of the Uruguay Round of multilateral trade negotiations
and the creation of the World Trade Organization, contained mutual concessions on commercial
trade barriers, and, more importantly perhaps, established binding dispute settlement mechanisms.
While these agreements have resolved some of the sharp differences from the past, questions
regarding the effectiveness of dispute resolution mechanism remain.
Meanwhile, several trade issues—some old, some new—have yet to be completely resolved.
Many of these disputes involve long-running battles over agricultural commodities or natural
resources, including softwood lumber and farm goods. Some analysts attribute the longevity of
these conflicts to the inherent incompatibility of the two countries’ different natural resource and
agricultural programs, others to the political sensitivity of the commodities under negotiation.
Softwood Lumber
A 1996 agreement restricting Canadian lumber exports to the United States expired in March
2001. Shortly thereafter, the U.S. Commerce Department launched countervailing duty and anti-
dumping investigations; in May 2002, the International Trade Commission (ITC) found that
Canadian imports threatened to injure U.S. industry, and Commerce applied 27% (later reduced)
duties on Canadian softwood. Canada challenged the agency decisions under NAFTA and in the
WTO.
After several years of inconclusive and sometimes conflicting litigation, the two sides announced
that they had struck a seven-year agreement on softwood on April 26, 2006. As part of a
complicated formula, the United States will allow unlimited imports of Canadian timber when
market prices remain above a specified level; when prices fall below that level, Canada will
impose export taxes and/or quotas. In addition, the United States will return to Canada a large
majority of the duties it had collected.44
The implementation of the softwood lumber agreement has not been without controversy. As the
depressed housing market has reduced demand for softwood lumber, the market price has been
under the level ($355 thousand board feet) in which export taxes must be charged. The United
States and Canada resorted to arbitration over the use of adjustment mechanisms to calculate the
43 Canada-U.S. Energy Relations. Updated April 14, 2009. Canadian Embassy website:
http://www.canadainternational.gc.ca/washington/bilat_can/energy-energie.aspx?lang=eng&menu_id=341&menu=L.
Country Analysis Briefs: Canada. U.S. Energy Information Administration website. Updated May 2009.
http://www.eia.doe.gov/emeu/cabs/Canada/Background.html.
44 “U.S. Gets a Lift In Lumber Fight With Canada.” By Ian Austen and Clifford Krauss. New York Times. August 31,
2005. “Conservative Government Wins Softwood Truce.” Globe and Mail. April 28, 2006.
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quotas used for eastern Canadian lumber. The arbitral panel sided with the United States, and
after Canada did not implement the panel’s recommendation, the United States levied a 10% tariff
on the affected lumber to recoup the compensation awarded by the arbitral panel in April 2009. In
January 2008, the United States also requested arbitration over six provincial forest sector
assistance programs in Québec and Ontario, programs that the United States believes contravene
the anti-circumvention provision of the SLA. The results of this arbitration have yet to be
announced.
U.S. lumber producers and some members of Congress have urged the Administration to seek
consultations under the SLA over timber grading practices in British Columbia. They claim that
the BC government has changed its classification procedures for timber and has been grading an
increasing amount of its cut as salvage Grade 4 lumber. For its part, Canada attributes this
increase to an infestation of mountain pine beetles and rejects the assertion that this policy
represents a subsidy for Canadian producers. On August 6, 2010, USTR Ron Kirk announced that
he would make a decision within a month on whether to launch consultations on the matter. 45
Black Liquor
Some companies in the U.S. pulp and paper industry had been utilizing a tax credit intended to
increase the use of alternative fuels. The industry has long produced energy (for internal
consumption) from “black liquor”—the liquid waste from pulping liquors used to dissolve the
lignin in wood and release the fibers needed to produce paper. Firms in the pulp and paper
industry had found that they could qualify for the tax credit by adding diesel fuel to their black
liquor by-product. It had been estimated that the industry could benefit by as much as $6 billion
from this tax program.46 Thus, Canadian firms saw this as an unfair subsidy to the U.S. pulp and
paper industry, although the program was not created or intended as an industry-specific subsidy.
Legislation to remove this subsidy was enacted as part of the Health Care and Education
Reconciliation Act of 2010 (P.L. 111-152). Recent rulings by the U.S. Internal Revenue Service
have further complicated issues, allowing black liquor to be eligible for the separate cellulosic
biofuel tax credit.47
Country of Origin Labeling
The 2002 Farm Bill required retailers to provide country-of-origin labeling (COOL) for fresh
produce, red meats, seafood, and peanuts. The requirements for seafood were implemented on
September 30, 2004, but COOL requirements for other products were delayed until September
30, 2008. The 2008 Farm Bill, The Food, Conservation, and Energy Act of 2008 (P.L. 110-246),
reaffirmed this timetable and added goat meat, chicken, ginseng, pecans, and macadamia nuts as
covered commodities. A final rule was issued on January 15, 2009, effective March 16, 2009. In
November 2009, the WTO established a dispute settlement panel to hear challenges to COOL
from Canada and Mexico. Canada claims the rule is a non-tariff barrier that has led to a steep
drop in beef and hog shipments to U.S. processors.
45 “U.S. Holding Off on Softwood Lumber Complaint, to Meet with Canada September 1,” Inside U.S. Trade, August
27, 2010.
46 “Lawmakers May Limit Paper Mills’ Windfall.” New York Times. April 18, 2009.
47 “Paper companies eye another serving of black liquor tax benefits.” Press-Register. August 15, 2010.
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Buy American Stimulus Provisions
The Buy American provision of the American Recovery and Reinvestment Act of 2009 (ARRA,
Sec. 1605, P.L. 111-5) states that no funds shall be appropriated for building projects or public
works projects unless all the iron, steel, and manufactured goods are made in the United States.
This provision was subject to three discrete waivers: (a) applying this policy would not be in the
public interest, (b) the iron, steel or manufactured products are not produced in sufficient
quantities or of a satisfactory quantity in the United States, or (C) the inclusion of the applicable
U.S. products would increase the cost of the overall project by more than 25%. The Senate added
language to ensure that the provisions are applied in a manner consistent with U.S. trade
obligations.
With regard to Canada, the United States has undertaken government procurement obligations
under the World Trade Organization’s (WTO) Agreement on Government Procurement (AGP)
and under the North American Free Trade Agreement (NAFTA). The AGP is a plurilateral
agreement that only binds those WTO members that agreed to undertake obligations under it.
Furthermore, the AGP only applies to the sectors and the procurement agencies that the national
government (and sub-national government agencies) includes in its schedule of national
commitments. NAFTA contains similar commitments on the national level, but excluded sub-
national entities.
Both the United States and Canada have undertaken extensive obligations to open their
government procurements at the national level under both agreements. However, because
Canadian provinces never signed up to the AGP, as had 37 U.S. states, regulations implementing
the ARRA excluded Canadian firms from bidding on ARRA-financed contracts that are tendered
by the U.S. states.48 In February 2010, the United States agreed to permit Canadian firms to bid
on sub-federal ARRA contracts in return for a Canadian commitment to sign its provinces up to
the AGP, which it did by notice to the WTO on March 19, 2010. In addition, both parties
committed themselves to begin negotiations reciprocally to expand commitments for market
access in procurement between the two countries. 49
Intellectual Property Rights
In 2010, the U.S. Trade Representative again listed Canada on its Special 301 report on
intellectual property rights protections to the priority watch list for intellectual property rights
protections.50 The priority watch list indicates that the listed trading partner has problems with
respect to IPR protection, enforcement, or market access for persons relying on intellectual
property and that these problems merit “increased bilateral attention.” In this designation, Canada
joins such notorious IPR violators as China and Russia. The United States again urged Canada to
implement the World Intellectual Property Organization’s Copyright treaty, which has been
signed but not ratified by Canada. 51 The United States also expressed concern about trade in
pirated and counterfeit goods in Canada, as well as weak enforcement and relatively lax penalties
48 Office of Management and Budget, “Updated Implementing Guidance for the American Recovery and Reinvestment
Act of 2009, April 3, 2009. pp. 160-166.
49 “U.S.-Canada Announce Buy American Deal, Provinces to Sign GPA,” Inside U.S. Trade, February 12, 2010.
50 United States Trade Representative, 2010 Special 301 Report, p. 25. Available at http://www.ustr.gov/webfm_send/
1906.
51 The WIPO Copyright treaty updates existing copyright protections for Internet and other electronic media.
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for IPR infringement. 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 by
customs agents without a court order. The government introduced a new Copyright
Modernization Act (C-32) in June 2010, which is intended to bring Canadian copyright law into
conformance with the WIPO Internet treaties and allow for some format shifting and fair-dealing
(fair-use) exceptions, but would prohibit the circumvention of digital protection measures. It
would clarify the rights and responsibilities of internet service providers for infringement of their
subscribers.52
Steel
The global economic crisis caused steel production and prices to fall precipitously in both the
United States in Canada. In response to low capacity utilization and low demand for steel,
Pittsburgh-based U.S. Steel moved to idle much of its Canadian operations including works in
Hamilton and Nanticoke, Ontario in March 2009. U.S. Steel had purchased these works from
bankrupt Canadian-based Stelco in 2007 and made certain production commitments during the
foreign investment review of its acquisition under the Investment Canada Act (ICA). In May
2009, the Canadian government challenged the closure of the plants as a breach of the
commitments it made in its ICA review. In July 2009, after reviewing U.S. Steel’s response, the
Canadian government took U.S. Steel Corp. to federal Court, asking the Court to order
appropriate measures to remedy the situation. In November 2009, U.S. Steel challenged
provisions of the ICA as violative of its procedural rights. Meanwhile, the Hamilton and Lake
Erie works have reopened based on improved demand and U.S. Steel had agreed to sell its
Hamilton bar and bloom mills to a German group.
Environmental Issues
The United States and Canada, which share a common border that stretches 5,500 miles,
cooperate extensively on environmental matters. Since they signed the Boundary Waters Treaty in
1909, the two countries have, through the International Joint Commission, worked together on
protecting and maintaining border waterways, especially the Great Lakes. In 1978, the two signed
the Great Lakes Water Quality Agreement.
In 2002, Canada ratified the Kyoto Agreement; in 2006, however, the government announced that
emission targets had been exceeded. The Harper government has established a goal of cutting
greenhouse gas emissions 20% by 2020. To do so, the government proposes numerous measures,
including increased reliance on hydro- and nuclear power, and revised regulations for the oil
sands industry.
The long feud over Pacific salmon—one of the more prominent bilateral disputes in recent
years—had both environmental and commercial aspects. Canada contended that American
fishermen were taking more than their equitable share of the migratory fish; the United States, on
the other hand, maintained that its fishing was in accordance with the 1985 Pacific Salmon Treaty
(PST) and with sound conservation practices. After a pause, talks resumed in 1997, and the two
52 “Bill Would Update Canadian Copyright Act To Respect Needs of Digital Age, Official Says,” International Trade
Reporter, June 10, 2010.
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sides finally reached an accord in 1999; both countries are monitoring implementation of the
agreement.53 The so-called Annex IV fisheries regimes of the PST were renegotiated in 2008.
One area of contention concerns the diversion of the naturally overflowing waters of Devils Lake,
in North Dakota. For flood-control purposes, the state has constructed a channel that diverts
excess water ultimately to the Red River, which flows northward. Manitobans have objected to
this solution, arguing that the lake water contains toxic chemicals from agricultural runoff; they
are also concerned that the introduction of alien species of aquatic life may disturb the ecological
balance and endanger recreational fishing in Lake Winnipeg, into which the Red River empties.
The Canadian government has requested that the case be referred to the International Joint
Commission. In April 2006, after meetings between senior environmental officials of the two
governments, the United States agreed to install a permanent filtration system at the Devils Lake
outlet. However, this filtration system, estimated to cost $15 million, has not been installed. In
February 2008, the North Dakota Supreme Court found that the state had acted improperly in
changing certain environmental standards for the water released from the lake’s outlet. At this
time, the channel operates intermittently, subject to North Dakota health regulations. Meanwhile,
Manitoba has offered to address the issue of a 30 mile border road that acts as a dike, trapping
water in northeastern North Dakota, if North Dakota installs the filtration system at the Devils
Lake Channel. North Dakota’s governor demurred, maintaining that the two issues are
unrelated.54
Other environmental problems the two countries have dealt with in recent years include
secondary wastewater treatment, control of predator fish and other invasive species introduced
into the Great Lakes by ocean-going vessels, and sustainability of the St. Lawrence Seaway. In
addition, the United States and Canada concluded a hazardous waste trade agreement in 1986;
more recently, transboundary shipments of solid waste, particularly from Ontario to Ohio,
Michigan, and other U.S. states, have been under review, and have been the subject of legislation
in the U.S. Congress. The two countries have continued the long-standing debate over the
ecological impact of possible development in Alaska’s Arctic National Wildlife Refuge. Finally,
the two sides continue to monitor the progress of the 1991 Canada-United States Air Quality
Agreement. On January 7, 2003, Canadian and U.S. officials announced a new Joint Border Air
Quality Strategy; under the initiative, pilot programs to reduce air pollution will be developed
involving stakeholders at the state, provincial and local levels.
Canada and Afghanistan55
Issue Definition
Canada has participated in military operations in Afghanistan from the outset of the conflict in the
fall of 2001. In early 2002, Ottawa deployed troops to Kandahar. However, as the mission
53 CRS Report RL30234, The Pacific Salmon Treaty: The 1999 Agreement and Renegotiated Annex IV, by Eugene H.
Buck.
54 “Devil Down South.” The Economist. July 16, 2005. “Little-Known White House Office Negotiates Devils Lake
Dispute.” AP. September 5, 2005. “U.S. Promises Devils Lake Filter, But Water May Flow Before Installation.”
Canadian Press. April 25, 2006. Manitoba Scores Partial victory In Water Dispute With North Dakota. The Canadian
Press. February 22, 2008; “ND governor to Manitoba: No deal on water dispute,” Fargo Forum, May 8, 2009.
55 Prepared by Carl Ek, Specialist in International Relations; Foreign Affairs, Defense, and Trade Division.
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changed focus from peacekeeping to counter-insurgency operations involving combat and
casualties, Canadian public support declined. Parliament approved legislation requiring Canada to
end its combat role by July 2011, and for all troops to be withdrawn by the end of that year. In the
fall of 2009, a long-running scandal erupted when it was alleged that Canadian troops had turned
over insurgent prisoners to Afghan officials, who subsequently tortured the detainees. The Obama
Administration has expressed support for a continued role in Afghanistan by Canada.
Background and Analysis
Canada was one of the first countries to join the U.S.-led military operation in Afghanistan. In
October, 2001 the Canadian government launched Operation Apollo, in support of Operation
Enduring Freedom. Nearly 900 infantry troops and approximately 40 members of Canada’s
Special Forces unit, Joint Task Force 2, served in the initial combat in Afghanistan. Canadian
forces—about 2,830 currently—have long been serving on the front line in combat operations in
southern Afghanistan to counter attacks by al Qaeda and Taliban fighters. Canadian troops
operate without national combat caveats. Canada has suffered among the heaviest casualties
proportionally of the NATO coalition member states; a total of 152 Canadians, including one
diplomat, have been killed in Afghanistan.
In addition to infantry troops, Canada has contributed a helicopter squadron and Operational
Mentor and Liaison Team (OMLT ) trainers; in addition, Royal Canadian Mounted Police are
assisting the Afghan National Police. In August 2005, Canada established a Provincial
Reconstruction Team in Kandahar in the volatile southern part of the country. Ottawa also has
provided humanitarian and reconstruction assistance to Afghanistan, which is the number one
recipient of Canadian foreign aid. Canada is among the top five donors to the country, and has
pledged C$1.9 billion (about $1.9 billion) through 2011 in reconstruction and development
assistance. Canada also currently shares the leadership of Regional Command-South with the
Netherlands and the UK.
As Canadian military operations in Afghanistan shifted from peacekeeping to counter-insurgency,
public support for Canada’s presence diminished. However, Prime Minister Harper has been
willing to challenge public opinion over Canada’s participation in Afghanistan; he has been
banking on an approach that emphasizes training Afghan troops to replace departing Canadians.
In 2006, he won a narrow vote in parliament to keep Canadian troops in Afghanistan for two
additional years. Harper initially characterized the mission as humanitarian in nature and also
asserted that it was in Canada’s national interest to demonstrate its ability to play a leadership role
internationally.
In the fall of 2007, Harper appointed an advisory panel to review options on the mission. The
commission found that the troop presence was justifiable and that the mission should be
maintained until 2011, but recommended that Canadian forces be withdrawn unless NATO allies
stepped up their contributions. This became the basis of a compromise between the Liberals and
Conservatives. Harper declared that Canadian troops would be withdrawn unless other NATO
countries provided an additional 1,000 troops. At the April 2008 NATO summit in Bucharest,
France and the United States announced that they would commit 800 additional troops. Canadian
troops are now scheduled to end combat activities by July 2011, and withdraw completely by
December 2011. At the April 2009 NATO summit, Canada reportedly pledged to send an
additional 100 civilian specialists to Afghanistan.
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Canada has established six priorities for its activities in Afghanistan: 1) training and mentoring, 2)
provision of basic services, 3) humanitarian assistance, 4) cooperation between Afghanistan and
Pakistan to control the border and stem the drug trade, 5) supporting democracy and the
development of governmental institutions, and 6) political reconciliation.
Canada’s Afghanistan mission was thrown into the national spotlight in November 2009, when a
Foreign Ministry whistleblower publicly alleged that, in 2006 and 2007, Canadian forces had
turned combatant prisoners over to local Afghan authorities, who subsequently tortured the
detainees; Foreign Affairs Minister Peter MacKay and other officials denied the charges, but later
backtracked somewhat. The controversy, which has generated considerable public interest, has
continued into mid-2010. An April 2010 public opinion survey indicated that 39% of Canadians
polled supported the Afghanistan mission, down from 59% in mid-2006. An August 2010 poll
showed that 53% of Canadians opposed the war, but that just 43% believed that Canadian
participation had been a mistake.
Status of the Issue
In March 2010, U.S. Secretary of State Hillary Clinton said during a visit to Ottawa that she
hoped Canada would continue its presence in Afghanistan after 2011, suggesting “a training role
instead of a combat role, a logistics-support role instead of front-line combat.” Some observers
have noted that the Obama Administration and NATO officials have privately expressed concerns
that the withdrawal of Canadian troops might prompt other allies to bring their troops home.
During a visit to Kandahar the following month, Defense Minister MacKay reiterated the
government’s intention to end the military mission in 2011. The Harper government has signaled
that it might maintain a presence in Afghanistan in a diplomatic capacity, and to assist in
developmental tasks. In August, however, MacKay indicated that some troops might remain in a
training and security capacity.
Questions
1. Canada is set to exit Afghanistan in 2011. Does that mean that all personnel—civilian and
military—will be leaving the country entirely, or is it possible that some will remain to assist in
development efforts, provide security, and train Afghan troops?
2. What role does the U.S. government hope Canada will play in Afghanistan after the scheduled
troop withdrawal? Has Washington made specific requests of Ottawa?
3. In what ways, if any, might the Afghanistan policies of a Liberal government differ from those
of the Conservatives?
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Canada’s Arctic Sovereignty Claim56
Issue Definition
Scientists have forecast that, by 2030 or earlier, global warming will reduce the Arctic ice pack in
Canada’s northern archipelago sufficiently to create a “northwest passage” that will permit
commercial ship traffic through the summer months. If created, a northwest passage would
significantly reduce transit distances for commercial ships operating between certain ports. It
could also be used by commercial fishing or cruise ships, ships supporting Arctic scientific
research or resource exploration, or military vessels. The presence of ships in the passage could
require the establishment and enforcement of shipping lanes and other rules for ensuring safe ship
operations, add to existing demands for maritime search and rescue capabilities, and create a risk
of environmental damage to the Arctic. The use of the passage by foreign military ships might be
viewed as creating potential security risks to Canada (and the United States). Successive
Canadian governments have maintained that such a passage would be an inland waterway, and
would therefore be sovereign Canadian territory, subject to Ottawa’s surveillance and regulation.
The United States, the European Union, Japan, and others assert that the passage would constitute
an international strait between two high seas.
Background and Analysis
Arctic sovereignty has been an issue for Canada for decades. In 1985, a U.S. icebreaker, the Polar
Sea, caused an uproar in Canada when it traversed the waters of the northern archipelago without
first seeking permission. Afterward, Washington and Ottawa came to an agreement in 1988 under
which the United States pledged to notify Canada when its ships would transit the region, and
Canada agreed to grant its consent. In recent years, however, the question over who, if anyone,
would have control over the regional waters has intensified as scientific consensus has grown that
the melting of the polar icecap will open up a Northwest Passage during the summer months.
The debate over the Northwest Passage has commercial, environmental, and security
considerations. The opening of a channel of water during the summer months through Canada’s
36,000-island arctic archipelago would cut shipping routes between Europe and Asia by 3,000-
4,000 miles, saving time and fuel costs. However, many Canadians are concerned that unfettered
maritime traffic through the region could result in serious environmental hazards ranging from
the catastrophe of an oil spill, to more cumulative pollution caused by ocean dumping of ballast
and garbage by transiting vessels. In terms of security, the Canadians are concerned that
recognition of the passage as international waters would result in free access to naval warships
and submarines, including, for example, those of Russia and China.
Canada seeks recognition of its sovereignty over the entire area, among other reasons, because of
a strong national identification with its northern regions. Ottawa argues that it has a historical
claim based on centuries of Inuit inhabitation—of the islands and of the ice extending from them.
From a practical standpoint, Canada wishes to have the ability to enforce protection of the fragile
arctic ecosystem and to ensure sustainable commercial fishing practices. In addition, the
56 Prepared by Carl Ek, Specialist in International Relations; Foreign Affairs, Defense, and Trade Division.
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Canadians want there to be no doubt that they have rights to the region’s abundant natural
resources, including oil, natural gas, minerals, and precious metals.
The Harper government has been seeking to bolster Canada’s sovereignty claim by maintaining
and expanding the “Northern Strategy” launched by his Liberal predecessors. The most visible
part of Conservatives’ plan has been the establishment of a stronger military presence. In July
2007, Harper announced plans for the construction of 6-8 armed, medium-sized icebreakers to
patrol the north. The following month, he traveled to Resolute Bay, Nunavut and announced plans
to construct a winter warfare training center and deep-water port in the region. He declared that
“Canada’s new government understands that the first principle of Arctic sovereignty is: Use it or
lose it.” Some Canadians, however, have criticized Harper for seeking to militarize the debate.
The prospective passage raises jurisdictional questions. Canadians maintain that it would be an
internal waterway and would likely require all vessels to register with their coast guard’s vessel
traffic reporting system. They contend that this would facilitate possible search-and-rescue
missions, and would dissuade ships bearing contraband from sailing through the region. There is
general agreement that the natural resources in the region are Canadian; the debate concerns free
transit rights. Analysts note that the UN Convention on the Law of the Seas calls for the right of
transit passage “between one part of the high seas ... and another part of the high seas ... .” In
addition, some analysts believe that the recognition of the Northwest Passage as a Canadian
inland waterway would set an international precedent that might be viewed as applicable
elsewhere in the world. Other governments could echo Canada’s sovereignty claim and prohibit
the passage of U.S. naval ships, as well as of oil tankers bound for the United States; the Straits of
Malacca and Hormuz have been cited as examples. Others, however, such as former U.S.
Ambassador to Canada Paul Cellucci, argue that it would be in the interests of U.S. national
security if Canada were to manage and police shipping through the straits.
Several possible solutions have been put forward. Some argue that Canada could achieve its
objectives through regulations approved by the UN International Maritime Organization. Also, it
has suggested that NORAD and the Arctic Council might be able to coordinate cooperative
patrolling of the passage. Others—though not the United States—have proposed that the
countries bordering the Arctic adopt an agreement prohibiting military, residential, or commercial
use of the region, as was done for Antarctica in 1959. Finally, some believe that a renewed and
updated version of the 1988 U.S.-Canada agreement would suffice.
Status of the Issue
The Bush Administration did not make a major issue of a potential future northwest passage. On
January 9, 2009, the White House issued National Security Presidential Directive 66, entitled
Arctic Region Policy. The document reiterated the Administration’s stance regarding Canada’s
sovereignty claim, stating that “the Northwest Passage is a strait used for international
navigation.” Some analysts believe that the Obama Administration is unlikely to reverse this
stance, and that, for the time being, Ottawa and Washington will continue to “agree to disagree.”
However, Canadian analysts have argued that the debate over who should manage the straits will
intensify if ships carrying hazardous materials or illegal immigrants are discovered in the region.
The government has emphasized its commitment to the Arctic through frequent visits by
government officials; Prime Minister Harper made his fifth annual trip to the north in August
2010. Also that month, Foreign Minister Lawrence Cannon announced a new “Statement on
Canada’s Arctic Policy,” which reaffirmed the government’s commitment to Canada’s
sovereignty, to economic and social development, to environmental protection, and to
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empowerment of the peoples of the region. The statement also emphasized the government’s
intention to negotiate settlements to long-standing boundary disputes with the United States and
Denmark. Because it has been highlighted as a priority area for the Harper government, this issue
will likely continue to be the subject of bilateral discussions between U.S. and Canadian
policymakers.
Questions
1. Several governments have taken issue with Canada’s assertion of sovereignty over the Arctic
waters. Do any foreign countries support Canada on this question? Has the Canadian government
offered a legal precedent for its claim?
2. If Canada were to win recognition of its sovereignty over the passage, how might it regulate
shipping traffic through the straits?
3. What might be the security, economic and environmental consequences for the United States if
Canada were to win its sovereignty claim? If the passage were to be declared international
waters?
Border Security Issues57
Issue Definition
Border security has emerged as an area of public concern, particularly after the September 11,
2001, terrorist attacks. Since the terrorist attacks, the United States and Canada have been striving
to balance adequate border security with the facilitation of legitimate cross-border travel and
commerce. As Congress passes legislation to enhance border security and the Administration puts
into place procedures to tighten border enforcement, concerns persist with respect to the potential
for terrorists to exploit the border. Congress previously passed significant border security-related
legislation as discussed below, and issues pertaining to the oversight of such legislation and their
possible policy implications for U.S.-Canada border relations continue to be of interest to
Congress. These issues include (1) the requirement that U.S. Citizens, Canadian nationals, and
other foreign nationals from countries in the Western Hemisphere, need a travel document to
enter the United States; and (2) improvements to infrastructure at the border and ports of entry.
Background and Analysis
Both the United States and Canada have taken various measures to better secure the shared border
while simultaneously preventing disruption to the flow of people and trade. Such efforts date
back to 1995 and include a 30-point plan, commonly referred to as the “Smart Border Accord”
(signed on December 12, 2001). The declaration includes a 30-point (now 32-point) plan to
secure the border and facilitate the flow of low-risk travelers and goods through coordinated law
enforcement operations, intelligence sharing, infrastructure improvements, improvement of
compatible immigration databases, visa policy coordination, common biometric identifiers in
57 Prepared by Chad C. Haddal, Specialist in Immigration Policy, Domestic Social Policy Division.
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travel documents, prescreening of air passengers, joint passenger analysis units, and improved
processing of refugee and asylum claims, among other things. On December 3, 2001, the two
countries signed a joint statement of cooperation on border security and migration that focuses on
detection and prosecution of security threats, the disruption of illegal migration, and the efficient
management of legitimate travel. Other efforts to increase border security between the U.S. and
Canadian government include the 1999 Canada-U.S. Partnership Forum (CUSP) and the
February 24, 1995, joint accord, Our Shared Border.
Congress also took action to better secure the border by passing the USA PATRIOT Act (P.L.
107-56). The act authorized the Attorney General to triple the number of border patrol personnel
and immigration inspectors along the northern border and authorized $50 million for the former
INS to make technological improvements and to acquire additional equipment for the northern
border. The Enhanced Border Security and Visa Reform Act of 2002 (the Border Security Act;
P.L. 107-173) similarly authorized additional personnel and technological and infrastructure
improvements at the borders. The Border Security Act contained a provision that required the
development of technology to track the entry and exit of foreign nationals (referred to as the US-
VISIT program). Both the USA PATRIOT Act and the Border Security Act required travel
documents to be tamper resistant and contain a biometric identifier that is unique to the card
holder.
Western Hemisphere Travel Initiative
Congress passed legislation that requires the Secretary of Homeland Security, in consultation with
the Secretary of State, to develop and implement a plan as expeditiously as possible to require a
passport or other document, or combination of documents, “deemed by the Secretary of
Homeland Security to be sufficient to denote identity and citizenship,” for all travelers entering
the United States. Commonly referred to as the Western Hemisphere Travel Initiative (WHTI),
this provision in the Intelligence Reform and Terrorism Prevention Act of 2004 (P.L. 108-458)
requires American and Canadian nationals (and other foreign nationals) to present some form of
approved travel document to enter the United States.
The Department of Homeland Security (DHS) and the Department of State (DOS) final rule for
WHTI took effect on June 1, 2009. Subsequently, DHS has ended the practice of accepting oral
declarations of citizenship at the land border and is currently requiring U.S. citizens to present a
passport, some other accepted biometric document, or the combination of a driver’s license and a
birth certificate, in order to reenter the country. Moreover, the WHTI final rule requires that U.S.
citizens present an approved secure document that denotes identity and citizenship at the land
border. This rule ends the previous practice of accepting driver’s licenses and birth certificates as
proof of identity and citizenship at the border. Approved documents include passport books,
passport cards, and frequent traveler cards (such as SENTRI, NEXUS, and FAST), while
additional provisions are made for military identification, tribal cards, and for certain special
groups of travelers.
Additionally, some states have entered into agreements with DHS and have developed (or are
developing) enhanced driver’s licenses (EDL) that include citizenship information and are valid
for WHTI purposes. The states currently issuing EDLs are Michigan, New York, Vermont, and
Washington. DHS has also stated that they are working with the Canadian government and
several Canadian provinces to develop EDLs or other similar documents for Canadian citizens
that would be valid for WHTI purposes. Thus, according to DHS, the provinces of British
Columbia, Manitoba, Ontario and Québec either do, or will soon, offer EDLs. Prior to its
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implementation, WHTI fostered much debate in Canada as well as the United States, as some
observers voiced concerns that the increased documentation requirements at the border may
suppress travel between the two nations. Yet, since its implementation much of the more vocal
criticism has dissipated.
Status of the Issue
The U.S. and Canadian governments continue to implement the provisions in the Smart Border
Accord. For example, both countries have expanded the NEXUS program to 19 border crossing
locations, 33 marine reporting locations, and 8 Canadian pre-clearance locations with kiosks.
Both countries continue to explore the feasibility of creating additional joint facilities at agreed
upon ports of entry and sharing of information through interoperable technology. Additionally,
both countries have begun to take steps to share passenger information on high-risk travelers en
route to either country through a risk-scoring scheme that was jointly developed; and in 2004, an
automated process to share “lookout” data between both countries was developed. However,
negotiations between the U.S. and Canada over two proposed pre-clearance pilot programs were
reportedly abandoned by DHS due to sovereignty issues, the right of individuals to withdraw
from inspections, and concerns about Canadian legal restrictions on Customs and Border
Protection officers’ authorities relating to arrests, fingerprinting, and other activities.
Questions
1. The WHTI has made significant changes to the documentary requirements needed to enter the
United States. What steps is the Canadian government taking to ensure that Canadian citizens are
aware of these changes? Will the Canadian government consider imposing similar requirements
on American citizens entering Canada? Will Canada develop its own version of the passport card
for Canadian citizens? Will Canadian provinces develop their own EDLs for WHTI?
2. In recent years, a number of different technologies, including the US-VISIT program, have
been implemented at northern ports of entry. With the advent of the WHTI, the demand for
improved infrastructure will continue to be critical. What measures have been taken by the
Canadian government to mitigate the impact of such a demand at its border crossings? Are there
collaborative efforts that could be undertaken to alleviate some of the pressure on busy ports of
entry?
3. The Smart Border Accord calls on the two countries to develop approaches to move customs
and immigration inspection activities away from the border. While such an approach is already
present at Canadian airports, there has been interest in expanding it to areas away from land ports
of entry. What is the Canadian government doing to facilitate this objective? What was the reason
that negotiations over the land-border pilot program failed? Are there any potential solutions for
the problems that led to the pre-clearance pilots to be scrapped?
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Border Security: Trade and Commercial Concerns58
Issue Definition
The aftermath of the terrorist attacks on the United States on September 11, 2001, 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 that closing the border would cause has
spurred cooperation between the United States and Canada to improve border security in an
atmosphere conducive to continued and expanded commerce. This brief details commercial
considerations in U.S.-Canadian border security discussions.
Background and Analysis
The issue of border security is linked to the increased integration of the United States and
Canadian economies. This integration has been aided by several trade agreements, culminating in
the North American Free Trade Agreement of 1994 (NAFTA). These trade agreements not only
eliminated tariff barriers between the two nations, but also reoriented Canada’s industrial
structure towards the United States. Industries in each country are now able to produce goods for
a larger continent-wide market, and productivity has increased through increased economies of
scale and specialization. Such specialization led to increased bilateral trade, much of it in
intermediate products. This integration has, in turn, led to industrial practices such as “just in
time” parts procurement that depend on a relatively open border.
The volume of economic activity across the border underscores the extent of economic
integration between the United States and Canada. Despite the global economic downturn, the
United States and Canada continue to have the largest trading relationship in the world with over
$1.2 billion per day in goods and services crossing the border in 2009. In that year, Canada
purchased 19% of U.S. exports and supplies 14.4% of all U.S. imports. The United States
supplied 51% of Canada’s imports of goods in 2009 and purchased 75% of Canada’s merchandise
exports; two-way trade with the United States represents nearly 31% of Canadian GDP. In 2009,
the Ambassador Bridge and Detroit-Windsor Tunnel complex that links Detroit, Michigan and
Windsor, Ontario was the largest trade link in the world with more than 3,200 daily truck
crossings totaling more than $72.3 billion per year.
Action Programs and Initiatives
Several new initiatives to increase security of the border without impeding the flow of commerce
were implemented under the Security and Prosperity Partnership (SPP), which in turn expanded
on previous bilateral efforts by the United States and Canada, including the Smart Border Action
Plan of December 2001 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,
58 Prepared by Ian F. Fergusson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
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supply chain management, clearance away from the border, joint or shared facilities,
enhancement of information sharing, and infrastructure improvements.
The U.S. Bureau of Customs and Border Protection’s Customs-Trade Partnership Against
Terrorism (C-TPAT) and the Canadian Border Security Agency’s Partners in Protection Program
are supply-chain security initiatives in which companies undertake audit-based compliance
measures to enhance security along the supply chain. Goods shipped under these programs are
eligible for preclearance away from the border.
The Free and Secure Trade (FAST) is a joint harmonized commercial processing initiative at 21
border locations, which provides for dedicated inspection lanes to goods carried by approved
lower-risk shippers, to goods purchased from pre-authorized importers such as C-TPAT, and to
goods transported by pre-authorized drivers and carriers. A complementary program (NEXUS) to
expedite the secure movement of people has also been established for frequent travelers who have
undergone security clearances on both sides of the border.
Another objective of the border security efforts has been the screening of goods entering North
America. The ongoing U.S. Container Security Initiative (CSI) is designed to pre-screen high risk
containers entering the United States at overseas ports of departure. Under the SPP, the three
countries will develop common screening methods and technology, establish criteria to identify
high risk cargo, and harmonize cargo information technology. Preclearance and prescreening is a
possible first step in the creation of a North American security perimeter, a concept whereby
clearance occurs at the first point of entrance rather than at the final border.
Status of the Issue
Land preclearance away from the border by U.S. and Canadian customs agents working in each
other’s territory is an issue that has proven controversial, primarily due to concerns about
sovereignty. Joint U.S.-Canada customs teams already operate in the CSI ports of Halifax,
Montreal, and Vancouver, as well as Newark and Seattle-Tacoma, although the visiting agent
serves only an advisory role with no enforcement powers. The SPP calls for negotiations on a
U.S.-Canada preclearance agreement with implementation of two pilot sites, the Peace Bridge
(Buffalo, NY-Fort Erie, ON) and the Thousand Islands Bridge (Alexandria Bay, NY-
Landsdowne, ON). However, these negotiations were suspended on April 26, 2007. A 2008 GAO
report cited disagreements over arrest authority, fingerprinting practices, and the right of
individuals to withdraw an application to enter the United States while at the preclearance station.
The Obama Administration reviewed this decision, but in August 2009 Secretary Napolitano
announced that negotiations to construct a preclearance site adjacent to the Peace Bridge would
not be reopened.
A second 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. For example, the Ambassador Bridge and the Detroit-Windsor Tunnel, which
together carry 25% of total U.S.-Canada cross-border traffic, both opened in 1930. Approaches to
the crossings, often city streets, have been criticized as inadequate to the commercial needs of the
21st century. This issue 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
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aging and adequacy of the border infrastructure may affect whether such improvements are
sustainable.
There are two competing plans to build additional bridge capacity over the Detroit River to ease
truck congestion on the Ambassador Bridge. One proposal involves building a new span adjacent
to the Ambassador and has been put forward by the private owner of the bridge. A competing
proposal, the Detroit River International Crossing (DRIC), would be built approximately 2 miles
south of the Ambassador between Zug Island in Detroit and Brighton Beach area of Windsor. The
DRIC proposal is supported by the Canadian government, which believes a new span should not
be privately held. To this end, then-Canadian Transport Minister John Baird offered to loan the
State of Michigan $550 million to fund its share of the new bridge, the total cost of which is
expected to be $5.3 billion. The Michigan House of Representatives approved the DRIC proposal
on May 27, 2010, and the bill is awaiting Michigan Senate consideration. Meanwhile, the owner
of the Ambassador Bridge has brought a North American Free Trade Agreement (NAFTA)
investor-state dispute over his contention that the proposed rival bridge would divert traffic (and
tolls) from his bridge.
Questions
1. Is Canada doing enough to secure the border against the transit of terrorists or weapons of mass
destruction? Do Canadians think that the United States has placed too much emphasis on securing
the northern border against terrorists to the detriment of efficient trade relations?
2. Do you believe land preclearance threatens Canadian sovereignty? What do you think of the
decision to terminate the land-preclearance pilot projects?
3. Are Canadian business and government officials concerned that another terrorist-related border
shutdown could cause the relocation of business to the United States or dampen the attractiveness
of Canada as a recipient of foreign investment?
4. How important is building a new Detroit-Windsor bridge to cross-border trade? The owner of
the Ambassador Bridge has offered to assume the cost of building a twin span adjacent to the
current bridge. Why not let him?
Immigration and Refugee Policies59
Issue Definition
Should the United States be concerned that Canada’s immigration and refugee laws and policies
pose a threat to its national security?
59 Prepared by Stephen F. Clarke, Senior Foreign Law Specialist, Western Law Division, Law Library of Congress.
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Background and Analysis
Although Canada does not have country or worldwide immigration quotas, the government does
establish annual targets. Between 2004 and 2009, Canada accepted between 235,000 and 262,000
new permanent residents annually. In this same period, an average of between 90,000 and
100,000 persons were accepted annually as temporary workers. New arrivals as permanent and
temporary residents total more than 1% of the entire Canadian population. Asian countries, such
as China, India, Pakistan, and the Philippines, are heavily represented at the top of the list of
countries from which Canada’s immigrants come, but no one nation dominates. Iran is the only
country adjacent to the Middle East that recently has been in the top ten. Security checks are
conducted by federal authorities. Because Québec, however, has an agreement with the federal
government that allows it to select immigrants intending to settle in that province, Québec’s
system adds a second screening process for its applicants. Québec also has addressed security
concerns by adjusting its programs for recruiting immigrants. The federal government and
Québec use point systems for assessing independent applicants that were changed ten years ago to
attract more highly skilled and educated immigrants, regardless of whether they had arranged
employment or not. Under this system, Canada has long accepted a much higher percentage of
independent immigrants and a much lower percentage of family class immigrants than the United
States. A decision to give priority to the processing of certain applicants who have arranged
employment drove the balance of the skilled worker category even higher relative to family class
immigrants, to a ratio of approximately 2.3:1 in 2008 and 2009.
One notable feature of Canadian immigration is that nearly three-quarters of the persons accepted
settle in the three largest cities: Toronto, Montreal, and Vancouver. This tendency, combined with
the high rate of immigration, has raised some concerns about destructive “diaspora nationalism”
emerging in these concentrated communities. The 2006 arrests of a group of Muslims who had
been raised in Canada and had planned attacks in southern Ontario fueled this concern. However,
this problem is not unique to Canada and opposition to immigration has not been voiced nearly as
loudly or as forcefully in Canada as it recently has been in parts of Western Europe. In fact,
immigration is still generally viewed as an opportunity for growth in what would otherwise be a
declining population.
The Canadian policy for asylum applicants is a far more contentious issue within the country than
immigration, not so much for its negative effects within Canada, but because it generally is
believed to invite fraud and abuse. Between 1998 and 2004, refugee claims began at around
25,000, rose to a high of about 45,000, and ended back down at approximately 25,000. In 2007,
the number of refugee claims was approximately 29,500, but it rose again to nearly 38,000 in
2008. The acceptance rate has consistently been somewhat higher than in the United States. In
2006, 47% of the refugee applications processed were accepted. In 2008, it reportedly rose to
58%. Of particular concern to Canadian officials prior to 2005 was the fact that approximately
40% of the overall total claimants and some 70% of port-of-entry claimants had entered Canada
through the United States. Canada is attractive to asylum applicants because it detains few
undocumented refugee claimants pending independent identification and because the federal and
provincial governments grant immediate assistance to applicants who have yet to substantiate
their claims. The result has been that the majority of Canada’s refugee claimants arrive in Canada
without any documents and are allowed free entry into the country, even though it is clear that
many disposed of the documents they had before coming to Canada. Canada is also attractive to
refugee claimants because it does not often detain undocumented arrivals.
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Several U.S. television programs that have portrayed the Canadian refugee system as extremely
liberal have received considerable attention in Canada. Most of these segments have mentioned
cases of terrorists from the Middle East who did or may have entered Canada as refugees with the
intention of launching attacks against U.S. targets. The most prominent of these cases is that of
the “millennium bomber.” Ahmed Ressam was captured in 1999 while crossing the border with
explosives that he planned to set off at Los Angeles International Airport on January 1, 2000. Also
highlighted have been the cases of suspected terrorists who have remained in the country for
many years while fighting their way through a very lengthy appeal process. In 2002, the Supreme
Court of Canada ruled that two persons linked to terrorist organizations could be deported to
countries where they might face torture, when security concerns so require. One of these
individuals was returned to Iran fairly quickly, but the other continued fighting his extradition to
Sri Lanka.
Media coverage of the Canadian refugee system has elicited a wide range of responses. While a
number of Canadian commentators agree that the United States has good reason to fear that
Canada’s refugee policies can be easily employed by terrorists to enter North America, others
contend that terrorists are more likely to use other means to enter both Canada and the United
States. Many analysts point out that the refugee system essentially has been used for “queue
jumping” by enterprising persons who might not qualify under Canada’s immigration laws.
Proponents of this view are exasperated by repetitions of the well-refuted myth that the
September 11 hijackers came from Canada and question how great the security risk to the United
States can be if a significant number of claimants are coming to Canada from this country.
In December 2002, the United States and Canada signed a Safe Third Country Agreement to
allow immigration officials in both countries to require most persons seeking asylum at a border
crossing to go back and present the claims in their respective countries. This type of agreement
had been called for in the Action Plan to the Smart Border Declaration signed in the aftermath of
the September 11 attacks in the United States. Implementation of the Agreement was delayed by
the lengthy and complicated process for drafting and approving appropriate regulations in the
United States, but it finally went into force at the beginning of 2005. In 2007, a judge of the
Federal Court of Canada held that the law implementing the Agreement was unconstitutional,
based on his finding that the United States does not fully comply with international conventions
on refugees. However, in 2008, the Federal Court of Appeals upheld the Safe Third Country
Agreement, in a decision the Supreme Court of Canada decided not to review in February 2009.
Although the Safe Third Country Agreement aims to limit asylum shopping and the filing of
multiple claims, it is limited in scope and subject to several major exceptions. One major
limitation is that it only covers the presentation of claims at land border crossings. Airport and
marine facilities are not covered except in very limited circumstances. The Agreement also
contains broad exceptions for relatives, including relatives of other asylum seekers, and it allows
the parties to “examine any refugee status claim made to that party where it determines that it is
in the public interest to do so.” Statistics show that the number of refugee claims presented at
border crossings in Canada declined by approximately 40% in the first half of 2005, and fewer
than 20,000 total claims were filed for the entire year. Although the data would suggest that the
Safe Third County Agreement had a dramatic immediate impact, it also has been noted that
claims presented at airports, which are not subject to the Agreement, initially were down about
25%. Thus, the Safe Third Country Agreement appears to have gone into effect during a period in
which the number of refugee claims already was declining. Since then, refugee claims have
increased again.
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Status of the Issue
One longstanding problem in Canada is that deportation is a very complicated and lengthy
process. The number of persons deported has been growing, but Canada’s Auditor-General found
in May 2008 that the government did not know the whereabouts of approximately two-thirds of
the over 60,000 persons who were subject to deportation or removal orders. Included in this
group are persons who were found to be inadmissible on the grounds of criminality. While the
Auditor-General was critical of the situation, she did not find that the missing persons constituted
a clear national security risk.
At the end of March 2010, the Minister of Citizenship, Immigration, and Multiculturalism
declared that “Canada’s asylum system is broken” and announced plans to reform it. In June
2010, parliament enacted the Balanced Refugee Reform Act, which aims to reduce the 19 months
it now takes to process the average refugee claim and the 4.5 years it now takes to remove the
average failed refugee claimant. The goals are to have refugee claims heard within 60 days of
being presented and removals of persons found not to be entitled to refugee protection to less than
one year. Since this act is not to come into force for another year, it remains to be seen whether
the government’s reforms will be more successful than previous attempts.
Questions
1. Could the Safe Third Country Agreement have had a broader application and apply to persons
making applications for refugee status within the country?
2. Are the reported cases of terrorists and high-risk persons entering North America through legal
means a sign of a potentially much greater threat?
3. Why do Canadian and U.S. officials maintain different detention policies in the case of
undocumented refugee claimants?
4. What steps does the Canadian government intend to take to keep track of persons subject to
deportation or removal orders?
5. Why does the government believe that the Balanced Refugee Reform Act will succeed in its
objectives when so many previous efforts over the past thirty years have failed?
Canada’s Free Trade Agreement Agenda60
Issue Definition
While the current Doha Round of multilateral World Trade Organization (WTO) negotiations
remain stalled, regional and bilateral free trade agreements (FTA) have become a prominent, if
controversial, feature of the world trading system. In the past, the United States was relatively
60 Written by Ian F. Fergusson, Specialist in International Trade and Finance; Foreign Affairs, Defense, and Trade
Division
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more aggressive in pursuing FTAs, while Canada emphasized multilateral trade liberalization to
supplement liberalization with its predominant partner, the United States, first through the U.S.-
Canada FTA and subsequently through the North American Free Trade Agreement (NAFTA).
This trend has shifted with Canada negotiating to conclude several FTAs, while in the United
States, proposed FTAs with Colombia, Panama, and South Korea await congressional
consideration in an uncertain environment.
Background
After concluding the U.S.-Canada FTA in 1988 and expanding it to include Mexico in 1994, both
countries made the new WTO the cornerstone of further trade liberalization. While both countries
concluded FTAs, political rationales were often paramount. For example, close ties prompted
both countries to conclude FTAs with Israel. Canadian attempts to establish a greater role in Latin
America were reflected in FTAs with Chile (1997) and Costa Rica (2002). Negotiations were
started with the European Free Trade Area nations (Norway, Switzerland, Iceland, and
Liechtenstein) in 1998, with Singapore and with the Central American Four (El Salvador,
Guatemala, Honduras, Nicaragua) in 2001, and with South Korea in July 2005. However, none of
these negotiations yielded an agreement during the Liberal governments of Jean Chrétien and
Paul Martin. Moreover, the importance of such agreements was overshadowed by the
overwhelming volume of Canadian trade that continued to be conducted under NAFTA, with the
United States continuing to account for the bulk of that trade.
In 2001, the George W. Bush Administration embarked on a new trade strategy known as
“competitive liberalization.” This policy pushed forward trade liberalization simultaneously on
bilateral, regional, and multilateral fronts. It was designed to spur trade negotiations by
liberalizing trade with countries willing to join FTAs, and to pressure other countries to negotiate
multilaterally. A pending agreement with Jordan, negotiated with the Clinton Administration was
passed by Congress in 2001. Under trade promotion authority (TPA) passed by Congress in 2002
and in effect until 2007, FTAs were negotiated and approved by Congress with Chile, Singapore,
Australia, Morocco, the countries of the Central American Customs Union and Dominican
Republic (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican
Republic), Bahrain, Oman, and Peru. In addition, negotiations were conducted with the nations of
the South African Customs Union (SACU) (Botswana, Lesotho, Namibia, South Africa, and
Swaziland), the United Arab Emirates, Malaysia, and Thailand, but they resulted in no agreement.
Negotiations with Colombia, Panama, and South Korea were concluded under TPA, but have yet
to receive congressional consideration. Currently, the Obama Administration’s trade policy has
stressed enforcement of existing trade agreements rather than negotiating new ones or seeking
approval for the three pending agreements. The one exception has been the launch of the Trans-
Pacific Partnership (TPP) talks among the United States, Australia, Brunei, Chile, New Zealand,
Peru, Singapore, and Vietnam.
The Conservative government of Prime Minister Stephen Harper, first elected in 2006, has placed
greater emphasis on negotiating regional and bilateral FTAs. Existing negotiations with EFTA
were concluded in January 2008, resulting in an agreement that was approved by Parliament in
January 2009 and received Royal Assent in April 2009. Negotiations with Peru and Colombia
were initiated in June 2007. An agreement was signed with Peru in May 2008, which was
approved by Parliament in June 2009 and received Royal Assent later in the month. Negotiations
with Colombia were concluded in November 2008, approved by Parliament on June 14, 2010,
and received Royal Assent on June 29. An FTA with Jordan was concluded in August 2008 and
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was introduced in the current Parliament on March 24, 2010. In general, the Conservative and
Liberal parties have voted to approve these agreements, but have been opposed by the labor-
influenced New Democratic Party (NDP) and the Québec-separatist Bloc Québecois.
In addition, negotiations have been started with Panama, the Dominican Republic, and the nations
of CARICOM, and are continuing with South Korea, Singapore and the Central American Four.
With South Korea, issues familiar to U.S. negotiators such as market access for beef and non-
tariff barriers in the auto sector are complicating the talks. Canada continues to express interest in
the TPP, but reportedly has encountered resistance from New Zealand and the United States over
its dairy supply management policies.
In May 2009, Canada and the European Union (EU) agreed to launch FTA negotiations, and 3
rounds of negotiations have occurred thus far. This negotiation is significant in that it raise issues
of concern to countries at a similar level of development and with relatively low tariffs. Issues
that have been flagged include the regulation of professional services, temporary entry for
business workers, and provincial participation in government procurement agreements.
Agreement on this latter point may become easier following the U.S.-Canada agreement on Buy
American provisions in the U.S. economic stimulus. (See related section on Buy American
Provisions.) Negotiations on agriculture likely will prove challenging as both sides will likely
seek to protect sensitive sectors, yet negotiations on traditional sticking points such as the EU’s
desire to protect geographic indications and Canadian supply-management policies reportedly
have not been precluded.
Status of the Issue
The Conservative government’s new enthusiasm for negotiating FTAs was recently was
expressed by International Trade Minister Peter Van Loan on April 23, 2010. Canada is pursuing
FTAs “with a vigor right now because we’re a trading country, our businesses need it, our
workers need it, our prosperity depends on it, so we’re going to make it happen for Canada and
not simply depend on the WTO.” While in some ways this policy resembles the ‘competitive
liberalization’ policy undertaken by the George W. Bush Administration, it remains to be seen
whether agreements resulting from such negotiations, will increase trade flows and lessen the
dependence of Canada on the U.S. market. It also remains to be seen whether Canada will retain
its traditional engagement in the WTO.
Questions
1. How controversial is the Canadian government’s trade policy? Does the public approve of
further trade liberalization? How does the continuing decline of the Canadian manufacturing
sector affect public attitudes towards free trade generally?
2. Do you think the emphasis on negotiating bilateral and regional FTAs complements or weakens
the multilateral trading system? Does this policy reflect a lack of confidence in the ability to
conclude the WTO Doha Round, or that Canada will not benefit much from a Doha agreement?
3. In the United States, labor and human rights concerns have delayed the passage of the proposed
Colombia FTA. How evident are such concerns in Canada? Do Canadian business view the
prompt passage of the Canada-Colombia FTA as a way to get a “leg up” in competing with U.S.
firms for that market?
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4. Should Canada actively try to join the TPP negotiations? Would joining the TPP advance the
objective, promoted by successive Canadian governments, of expanding Canada’s role in the
Asia-Pacific region? Is Canada prepared to address liberalization of its dairy supply management
programs?
G-8 and G-20 Leader Summits, June 201061
Issue Definition
The G-8 and the G-20 are international forums where leaders and ministers of major countries
gather to discuss and coordinate international policies. The G-8 is a group of advanced countries
(Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States),
while the G-20 also includes major emerging-market countries (the G-8 plus Argentina, Australia,
Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea,
Turkey, and the European Union (EU)). Canada holds the G-8 rotating presidency in 2010, and as
part of these duties, Canada hosted the annual G-8 leader summit on June 25-26 in the Muskoka
region of Ontario. After it was announced by the G-20 leaders in September 2009 that,
henceforth, the G-20 would be the premier forum for international economic coordination, it was
decided that Canada would also host a G-20 leader summit in Toronto (June 26-27) immediately
following the G-8 summit. South Korea is the chair of the G-20 in 2010 and is to hold a G-20
summit in November in Seoul.
Background and Analysis
The G-8, the G-20, and the Financial Crisis
Since the mid-1970s, leaders from the G-7 (Canada, France, Germany, Italy, Japan, the United
Kingdom, and the United States), a small group of developed countries, have gathered annually to
discuss and coordinate financial and economic policies. Over time, the G-7 focus on
macroeconomic policy coordination expanded to include a variety of global and transnational
issues, such as the environment, crime, drugs, AIDS, and terrorism. In the late 1990s, Russia was
included in the G-7 discussions on non-economic issues, creating the G-8.
The G-20 was formed in the late 1990s, after the Asian financial crisis in 1997-8 illustrated
economic interdependence between developed and emerging-market countries, and that emerging
markets were too important to exclude from international economic discussions. The G-20
remained a less prominent forum than the G-7 until the onset of the financial crisis in fall 2008,
when the G-7 leaders decided to meet as the G-20 leaders to discuss and coordinate policy
responses to the crisis. To date, the G-20 leaders have held four summits to coordinate policy
responses to the crisis: November 2008 in Washington, DC; April 2009 in London; September
2009 in Pittsburgh; and June 2010 in Toronto. At the Pittsburgh summit, the G-20 leaders
announced that the G-20 would henceforth be the premier forum for international economic
coordination, supplanting the G-8’s role as such.
61 Prepared by Rebecca M. Nelson, Analyst in International Trade and Finance, and James K. Jackson, Specialist in
International Trade and Finance, Foreign Affairs, Defense, and Trade Division.
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Perhaps the most central theme of the G-20 summits held to date has been financial regulatory
reform. The G-20 leaders pledged to expand the transparency of complex financial instruments,
strengthen and harmonize capital standards, reassess banker compensation, regulate all
systemically important financial institutions, regulate credit rating agencies, and combat illicit
financial activities, among other commitments. The G-20 leaders have made commitments on a
variety of issue areas, including tripling the resources of the International Monetary Fund (IMF),
creating a new framework to monitor and coordinate economic policies, voting reform at
international financial institutions, climate change, foreign aid, and trade.
The Toronto Summit
The Toronto Summit was held against a backdrop of growing economic uncertainty as looming
sovereign debt crises and growing political instability in a number of European countries was
roiling international credit markets. The Summit exposed rifts among members of the European
Union (EU) and between the United States and some members of the EU over, on one hand, fiscal
austerity and deficit reduction and, on the other hand, the need to provide fiscal stimulus to boost
employment and prevent a slide back into recession by the advanced economies. These
differences exposed the difficult choices faced by policymakers in major economies. Rising
government debt levels as a result of stimulus programs adopted to blunt the impact of the
economic recession and falling revenues and rising expenditures associated with automatic
stabilizers are raising concerns in international credit markets. In addition, economic indicators in
developed economies increasingly are giving mixed signals about prospects for a sustainable
economic recovery and a potential for slippage back into recession.
G-20 leaders addressed five major areas, as reflected in their final declaration at the Summit.
These five areas are 1) Growth; 2) the Framework for Strong, Sustainable Growth; 3) Financial
Sector Reform; 4) International Financial Institutions and Development; and 5) Fighting
Protectionism and Promoting Trade and Investment. In the lead-up to the summit, there was
discussion about a G-20 commitment on introducing a bank tax, or levy, but in the end no
agreement was reached.
Growth and Debates over Fiscal Stimulus vs. Fiscal Austerity
During the previous three G-20 summits, G-20 leaders made commitments to adopt economic
stimulus measures to blunt the economic recession associated with the recent financial crisis.
Over the past year, however, various G-20 leaders have hewed less to the consensus forged during
the depths of the financial crisis and have begun to chart their own individual policy courses
geared more to the needs of their particular economic circumstances. The Summit Declaration
argued that, “while growth is returning, the recovery is uneven and fragile, unemployment in
many countries remains at unacceptable levels, and the social impact of the crisis is still widely
felt … recent events highlight the importance of sustainable public finances and the need for our
countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal
sustainability, differentiated for and tailored to national circumstances.” At the same time,
concerns about debt levels in advanced economies were recognized by the G-20 leaders. In the
Declaration, the G-20 leaders announced that advanced countries would commit to halve deficits
by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016.
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The Framework for Strong, Sustainable Growth
Some believe that the United States’ external deficit and China’s external surplus contributed to
an unstable imbalance in the world financial system. In order to correct this imbalance, and
promote compatible national economic policies in the future, the G-20 announced a new
“Framework for Strong, Sustainable and Balanced Growth” at the Pittsburgh summit in
September 2009. The Framework would operate in three stages. First, the G-20 members would
agree on shared policy objectives, updated as economic conditions evolve. Second, each G-20
member would agree to establish national, medium-term policy frameworks, and the G-20
members would work in conjunction with the IMF to assess the collective implications of
national policy frameworks for global growth and financial stability. Third, the G-20 members
would, based on the results of the peer review process, consider and agree to actions that are
necessary to meet the common objectives. The first stage of this mutual assessment process was
completed for the Toronto summit and the second stage is to be completed by the Seoul summit in
November.
Financial Sector Reform
Financial sector reform has been a major focus of national and international efforts since the
recent financial crisis. The G-20 efforts to date have focused on measures that are intended to
“build a more resilient financial system that serves the needs of our economies, reduces moral
hazard, limits the build up of systemic risk, and supports strong and stable economic growth.”
Going forward, the reform agenda rests on four “pillars.” These pillars are 1) a strong regulatory
framework; 2) effective supervision; 3) resolution and addressing systemic institutions; and 4)
transparent international assessment and peer review.
International Financial Institutions and Development
International financial institutions such as the International Monetary Fund (IMF) have played a
unique role helping to marshal support for some of the smaller developed economies as they have
faced a serious sovereign debt crisis. The G-20 also pledged to strengthen the “legitimacy,
credibility, and effectiveness of the International Financial Institutions (IFIs) and provide $350
billion in capital increases to the Multilateral Development Banks (MDBs).”
At the G-20 Pittsburgh summit in September 2009, the G-20 pledged a shift of at least 5% of the
IMF quota share (which impacts voting power) from over-represented countries to under-
represented countries by January 2011. The G-20 leaders also committed to increase at least 3%
of the voting power for developing and transition countries at the World Bank. Progress has been
made to shift voting power at the World Bank, but quota reform at the IMF has stalled. In the
Toronto Declaration, the G-20 leaders pledged to push for an agreement on IMF quota reform by
the next G-20 summit, scheduled to be held in Seoul, Korea in November 2010.
Fighting Protectionism and Promoting Trade and Investment
The Toronto Declaration reiterated the group’s commitment until the end of 2013 to keep markets
open and to refrain from raising barriers or imposing new barriers to investment or trade in goods
and services. The Declaration also indicated that the G-20 members support bringing the WTO
Doha Development Round to a “balanced and ambitious conclusion as soon as possible.” This
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language is somewhat weaker than the language in Declarations from the previous G-20 summits,
which outlined specific timeframes for completing the Doha negotiations.
Questions
1. The Declaration states that fiscal consolidation plans by G-20 members should abide by three
principles: 1) the fiscal consolidation plans will be credible; 2) the time to communicate medium-
term plans is now; and 3) fiscal consolidation will focus on measures that will foster economic
growth. Does a potential conflict exist between efforts to engage in fiscal consolidation and the
short-run prospects for economic growth? If so, how does the administration plan to address such
conflicts among members of the G-20?
2. The Declaration also says that surplus countries should undertake reforms to reduce their
reliance on external demand and focus more on domestic sources of growth. Days before the G-
20 summit, the Chinese government announced it would slowly allow its currency to appreciate.
Has this appreciation been adequate? What policies should other surplus countries—Germany, for
example—undertake?
3. What progress has been made to date on the four pillars of financial reform as outlined in the
G-20 Declaration? Is greater progress necessary in both the U.S. approach and in the measures
adopted by other G-20 members, particularly by the European Union, to achieve the goals as
outlined in the Declaration?
4. What are the prospects for reaching an agreement for IMF quota reform by the November
summit in Seoul? What have been the obstacles to such an agreement?
5. What are the main goals for the November summit in Seoul? Are there any issues where
agreement was not reached in Toronto that are expected to be discussed further in Seoul?
North American Cooperation on Competitiveness
and Security62
Issue Definition
How can the United States improve cooperation with its North American neighbors on issues
related to trade, transportation, and security? How are the United States, Canada, and Mexico
currently cooperating on improving competitiveness, promoting economic growth, and enhancing
security in North America?
62 Prepared by Angeles Villarreal, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
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Background and Analysis
At the 2009 North American Leaders Summit in Guadalajara, Mexico, President Barack Obama
met with Canadian Prime Minister Stephen Harper and Mexican President Felipe Calderón to
discuss issues of prosperity and security in North America. The three leaders renewed their
commitment to regulatory cooperation by instructing ministers in the three countries to build
upon previous efforts, develop focused priorities, and form a specific time line. The three
countries confirmed their commitment at an October 2009 meeting of the Free Trade Commission
(FTC).
The Bush Administration’s main efforts to increase North American cooperation were made
through the Security and Prosperity Partnership of North America (SPP), a trilateral government
initiative launched in March 2005. The main goal was to increase and enhance prosperity in the
United States, Canada, and Mexico through regulatory cooperation. Though the SPP forum is no
longer active, much of the prior work on the underlying issues is continuing under the Obama
Administration. The SPP was endorsed by all three countries, but it was not a signed agreement or
treaty and, therefore, contained no legally binding commitments or obligations. It could, at best,
be characterized as an endeavor to facilitate communication and cooperation across several key
policy areas of mutual interest. Although the SPP built upon the existing trade and economic
relationship of the three countries, it was not part of a trade agreement, and distinct from the
existing North American Free Trade Agreement (NAFTA). The efforts to increase North
American cooperation under the SPP were not an effort to create a common market in North
America. Such a move would require a government approval process within each of the three
countries.
Efforts to increase North American regulatory cooperation have mostly focused on the
recommendations of special working groups created under the SPP. The latest recommendations
came in 2008 when the groups agreed to continue to identify and focus on a set of high priority
initiatives: 1) to increase the competitiveness of North American businesses and economies
through more compatible regulations; 2) to make borders smarter and more secure by
coordinating long-term infrastructure plans, enhancing services, and reducing bottlenecks and
congestion at major border crossings; 3) to strengthen energy security and protect the
environment by developing a framework for harmonization of energy efficiency standards and
sharing technical information; 4) to improve access to safe food, and health and consumer
products by increasing cooperation and information sharing on the safety of food and products;
and 5) to improve the North American response to emergencies by updating bilateral agreements
to enable government authorities from the three countries to help each other more quickly and
efficiently during times of crisis.
North American efforts related to increasing prosperity within the region have consisted of
increasing cooperation in information sharing, harmonization of standards, productivity
improvement, reductions in the costs of trade, and enhancement of the quality of life. The three
countries have also addressed the need to enhance North American competitiveness through
compatible regulations and standards that would help them protect health, safety and the
environment, as well as to facilitate trade in goods and services across borders.
Efforts regarding the security initiative have focused on cooperative activities undertaken by each
country on protecting citizens from terrorist threats and transnational crime, while promoting the
safe and efficient movement of legitimate people and goods. Work in this area has been organized
along three broad themes: 1) external threats to North America; 2) streamlined and secured shared
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borders; and 3) prevention and response within North America. The three countries also have
cooperated on policies that facilitate the efficient entry of legitimate cargo while simultaneously
ensuring that a sufficient level of security and scrutiny is applied to deny the entry of illegitimate
cargo.
Some critics of the Obama Administration’s efforts on North American regulatory cooperation
contend that it is a continuation of President Bush’s SPP initiative and an attempt to create a
common market or economic union in North America. Others have contended that past efforts
under the SPP were contributing to the creation of a so-called “NAFTA Superhighway” that
would link the United States, Canada, and Mexico with a “super-corridor.” Proponents of North
American competitiveness and security cooperation view the initiatives as constructive to
addressing issues of mutual interest and benefit for all three countries. Business groups generally
support increased North American cooperation and believe that it is necessary to enhance the
competitiveness of U.S. businesses in the global market.
The U.S. government has made no plans to pursue a “North American Union” with Canada and
Mexico. Neither has the federal government made any plans to build a “NAFTA Superhighway,”
nor for a super-corridor initiative of any sort. Further, no legal authority exists and no funds have
been appropriated to construct such a superhighway. If the United States were to potentially
consider the formation of a customs union or common market with its North American neighbors,
it would require approval by the U.S. Congress.
Status of the Issue
The United States, Canada, and Mexico have made progress in recent years in addressing issues
related to North American competitiveness and security. The Obama Administration has affirmed
its commitment to continue past efforts on North American cooperation but under a different
approach from the SPP framework. The 2009 North American Leaders Summit and the former
SPP have served as mechanisms to increase communications among North American trading
partners on issues of mutual interest, but because there are no binding agreements, their role in
improving prosperity and security has been limited.
Questions
1. How effective has North American cooperation been in improving competitiveness through its
focus on intellectual property rights protection and regulatory harmonization? What other steps
can be taken by the three countries to improve competitiveness of U.S. businesses?
2. How effective has North American cooperation been in improving safety, security, and the flow
of goods and services among NAFTA partners? What other steps could be taken in these areas?
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Canada’s Financial System63
Issue Definition
Canadian banks on the whole weathered the recent financial crisis better than banks in the United
States and Europe. Canada’s financial system was buffeted by the financial crisis as equity and
housing prices fell and as economic growth decreased as a result of the downturn in global trade.
Are there lessons to be learned from Canada’s banking system, which has proven to be somewhat
more immune to the financial troubles that have brought down better known banks?
Background and Analysis
Canada’s financial system proved to be more resistant to the failures and bailout that marked
systems in the United States and Europe. Nevertheless, the financial crisis and global economic
recession battered the Canadian economy in ways that are similar to those in the United States
and in Europe. The Bank of Canada recently forecast that growth in the Canadian economy would
rebound in 2010 by 3.7% due to lingering effects of fiscal and monetary stimulus experience. In
January 2009, the Canadian government announced a US $33 billion fiscal stimulus package over
two years in infrastructure spending, tax decreases, worker retraining, housing, and aid to
struggling industries to spur the Canadian economy. The housing sector is experiencing strong
growth as a result of low interest rates and consumer spending has responded to the fiscal
stimulus. The strong Canadian dollar combined with a relatively lower rate of productivity in
Canada and weak demand for Canadian exports from the United States are expected to act as a
significant drag on economic growth in the second half of 2010.
During the recent financial crisis, Canadian banks suffered a loss of 50% in the value of their
equities and the Canadian Imperial Bank of Commerce lost $2.1 billion in derivatives. The Bank
of Canada, however, was not forced to follow other central banks by injecting capital into any
Canadian bank. With ample liquidity and low funding costs, Canadian banks have been in a
position to provide additional support to the Canadian economy. Borrowing costs for Canadian
households have remain low and mortgage and consumer credit have grown at a faster pace than
was expected by the Bank of Canada. Recently, Germany, France, and the United Kingdom
adopted measures to provide for a bank “stability” tax. In essence, a bank tax requires banks, and
other financial institutions, to place an amount equal to a certain percentage of their capital into a
fund to reimburse national governments for funds that were expended during a financial crisis to
shore up the capital base of banks that had been weakened by the crisis. Canadian leaders have
opposed the use of a bank tax and have argued that such a fund is not necessary for Canada
In a recent assessment of Canada’s financial system, the IMF concluded that Canada’s system is
highly mature, sophisticated, and well-managed. In addition, the system is characterized by strong
prudential regulation and supervision and a well-designed system of deposit insurance and
arrangements for crisis management and resolution of failed banks. Supervisory responsibility for
the financial sector in Canada is divided among the federal government, the provincial
governments, and among a group of agencies within the federal government. The federal
63 Prepared by James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
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government is responsible for supervising all banks, federally incorporated insurance companies,
trust and loan companies, cooperative credit associations and federal pension plans. Provincial
governments are responsible for supervising securities dealers, mutual fund and investment
advisors, credit unions, and provincially incorporated trust, loan, and insurance companies. As a
result, there are 13 regulatory authorities, each administering a separate set of securities laws and
regulations.
Within the federal government, the Financial Institutions Supervisory Committee (FISC) acts as
the chief coordinating body that sets regulatory policy and supervises financial institutions. The
Committee is comprised of the Department of Finance of the Ministry of Finance and four
independent government agencies: the Office of the Superintendent of Financial Institutions
(OSFI); the Bank of Canada; the Canada Deposit Insurance Corporation; and the Financial
Consumer Agency of Canada (FCAC). All of these agencies report to the Minister of Finance,
who is responsible to the Canadian Parliament. The Bank of Canada is responsible primarily for
conducting monetary policy by setting interest rate targets and adjusting the supply of credit. The
Bank also serves as the key component in the payments system by providing a check clearing
function, and it serves as the traditional lender of last resort. The Office of the Superintendent of
Financial Institutions plays a key role in Canada’s financial supervisory scheme by supervising all
domestic banks, branches of foreign banks operating in Canada, trust and loan companies,
cooperative credit companies, life insurance companies, and property and casualty insurance
companies.
The financial system is dominated by five large banking groups (Royal Bank of Canada, TD
Canada Trust, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank) that account
for about 60% of total assets. In comparison, foreign banks account for about 4% of assets. The
low representation by foreign banks is attributed to the “widely-held” rule for large banks that
limits the concentration of bank share ownership and, therefore, reduces the scope for mergers
and for foreign entry through acquisition. Canada’s financial legal framework has allowed
Canadian banks to concentrate on their low-risk, profitable domestic retail banking activities
(services provided to individuals including deposits, savings accounts, mortgages, credit cards,
etc.), leaving large domestic borrowers to conduct their wholesale banking activities (services
provided to corporations, governments, and other entities) abroad. Canada’s insurance sector is
dominated by three large domestic groups, which account for over 80% of the assets in this
sector. The securities sector is marked by large Canadian, as well as U.S. and U.K. securities
firms.
Unlike the United States and some European countries, subprime mortgages account for less than
5% of Canadian mortgages, which sharply limited Canada’s direct exposure to the meltdown that
occurred in the subprime mortgage market. In addition, Canadian law requires that all bank-held
mortgages with a loan-to-value ratio above 80% be insured, which has curtailed the securitization
of mortgages by banks in Canada. In addition, prepayment penalties and the lack of interest
deductibility reduces the demand for long-term mortgages, so the maturity of most mortgages
does not exceed 5 to 10 years.
Canada’s financial supervisory system and regulatory structure have proven to be less susceptible
to the bank failures that have loomed in the United States and Europe. Nevertheless, Canada’s
approach has a number of drawbacks. Canada’s system of regulating securities markets at the
provincial level means that regulations regarding market participants and investor protection
differ by province and that the nature, structure, and powers of the provincial regulators also vary.
In addition, the conservative, risk-adverse approach employed by Canada’s banks shielded the
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banks from some of the current financial turmoil, the approach also reduces efficiency in the
market and reduces competition. Acquisitions of Canadian banks is significantly impeded by the
rule that bank stocks be widely held and mergers are effectively prohibited. With reduced
competitiveness pressures, Canadian banks maintain low-risk balance sheets at the expense of
greater innovation and more efficient capital allocation. This approach also means that financing
for small firms and venture capital for potentially high-growth companies is sharply reduced.
Questions
1. There is much to admire about the Canadian banking system, but do the differences in the size
and the scope of the U.S. and Canadian financial markets reduce the importance of the Canadian
system as a model for the United States to follow?
2. Are there aspects of Canada’s federal supervision of its banking system that could serve as a
model for bank supervision by the United States?
3. Canada’s approach to financial supervision concentrates the majority of that responsibility in
an authority that is separate from the central bank. Although the United States is considering a
different approach, are there aspects of Canada’s regulatory structure that could be used as a
potential model for the United States?
Buy American Provisions64
Issue Definition
The Buy American provision of the economic stimulus package, officially known as the
American Recovery and Reinvestment Act (P.L. 111-5), requires that iron, steel, and
manufactured goods used in the construction of public works projects funded by the act be made
in the United States. This provision was widely criticized by U.S. trading partners, including
Canada, based on the fear that the act, if not outright inconsistent with U.S. international trade
obligations, would set a precedent that could provide the excuse for a cycle of “creeping
protectionism” by other nations. However, some analysts note that the relationship between
government procurement and the world trading system has always been tenuous, and that
disciplines on government procurement have not been as rigorous as those on other trade
practices.
Background and Analysis
The Buy American provision of the ARRA states that no funds may appropriated for building
projects or public works projects unless all the iron, steel, and manufactured goods are made in
the United States. The act provides three discrete exceptions for cases in which a Federal agency
administrator finds that (1) applying this policy would not be in the public interest, (2) the iron,
steel or manufactured products are not produced in sufficient quantities or of a satisfactory
64 This section was written by Ian F. Fergusson, Specialist in International Trade and Finance; Foreign Affairs,
Defense, and Trade Division.
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quantity in the United States, or (3) the inclusion of the applicable U.S. products would increase
the cost of the overall project by more than 25%. In the case of (1), the public interest waiver has
been used to invoke the authority granted to the President to waive discriminatory purchasing
requirements for signatories of the WTO Agreement on Government Procurement (AGP)
contained in the Trade Agreement Act of 1979 (Sec. 301, P.L. 96-39). In the case of (3), this cost
differential is at variance with the general differential of 6% applicable to most Federal contracts,
12% in cases of small business or minority set-asides, or 50% for most Department of Defense
procurements. If any of these provisions are waived, the agency head must publish a justification
for the waiver in the Federal Register. Finally, the Senate added language to insure that the
provisions are applied in a manner consistent with U.S. trade obligations.
The United States and Canada both are signatories to the World Trade Organization’s Agreement
on Government Procurement (AGP), which came into effect in 1996. Unlike most of the Uruguay
Round agreements which make up the WTO system, the AGP is plurilateral in that it only binds
those nations that have accepted it. Currently, there are 39 signatories to the agreement,
predominantly developed and middle- income countries.
The AGP commits signatories to practice the principles of national treatment and most-favored-
nation treatment in the laws, regulations, practices, and procedures concerning government
procurement. In this context, national treatment means that a signatory will provide no less
favorable treatment to another party’s products, goods, and suppliers than its own in its
government procurement process, nor will the signatory discriminate between the products,
services and suppliers of other parties under most-favored -nation principles. The agreement also
provides procedures to insure transparency, including detailed operating rules on the procurement
process of the signatory, a challenge procedure by which a rejected bid can be independently and
impartially reviewed, and recourse to WTO dispute settlement provisions in cases where the
parties cannot resolve their differences.
The AGP only applies to the sectors and the procurement agencies that each government includes
in its schedule of national commitments. Each member’s schedule lists the national and sub-
national agencies as well as other entities that participate, exceptions within those units, and the
threshold value for procurement tendered under its obligations. Both the United States and
Canada have undertaken extensive obligations to open their government procurements at the
national level under both agreements. Thus Canadian firms may bid on ARRA-related federal
procurement under the provisions of the AGP. Thirty-seven U.S. states as well as other
government entities such as the Tennessee Valley Authority and the Port Authority of New York
and New Jersey have made commitments under the AGP. Threshold values do apply for AGP
contracts; projects valued under approximately $7.8 million for construction projects are not
covered under the AGP. While Canada has undertaken obligations for several of its crown
corporations such as Canada Post and the St. Lawrence Seaway Authority, the ten provincial
governments and three territorial governments have not undertaken any obligations under the
AGP.
Likely for this reason, the Office of Management and Budget (OMB) excluded Canada from the
list of countries to which U.S. states participating in the AGP have international obligations under
the AGP. This meant that for state and local projects funded by federal money from the stimulus
bill, there was no obligation to treat Canadian firms in a manner consistent with U.S. obligations
under the AGP. Thus, Canadian firms would be ineligible to bid on contracts for iron, steel, and
manufactured products procured for public works projects undertaken by state and local
governments using federal stimulus money.
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Each schedule also contains interpretations and exceptions. For example, Federal funds
distributed to the states for mass transit and highway projects are excluded. This reflects the Buy
American provisions of the Surface Transportation Act of 1982 (P.L. 97-424) and the Urban Mass
Transit Act of 1964 (P.L. 88-365). In addition, twelve states exclude the procurement of
construction-grade steel, motor vehicles and coal from their obligations under the AGP and states
have excluded other products and services as well. Canada has exempted certain of its
procurement activities from coverage under the AGP such as shipbuilding and repair, and urban
rail and urban transportation equipment, including specifically all project related materials of iron
or steel.
Status of the Issue
Some Canadian industries were reportedly hard-hit by the Buy American provisions, especially
those firms that comprise part of an integrated supply chain. In addition, there had been several
anecdotal reports in the Canadian press that U.S. contractors and suppliers are increasingly
choosing to source domestically in order not to be hassled with complying with Buy American
provisions even in cases where procuring from Canadian firms would be consistent with ARRA.
As a result, the United States and Canada started negotiations to resolve this dispute in August
2009. The resulting agreement, which became effective on February 16, 2010, waives the Buy
American provisions for Canadian firms bidding for ARRA contracts tendered from 7 federal
programs in the 37 states that participate in the AGP until September 30, 2011. In return,
Canada’s provinces and territories will become signatories to the AGP, opening procurement
opportunities to U.S. firms. This agreement will only affect procurement tenders yet to be
awarded; this action will not reopen existing contracts. The agreement also commits the parties to
begin negotiations reciprocally to expand commitments for market access in procurement
between the two countries. The ability of Canadian firms to benefit from the immediate terms of
the agreement may depend on the value of the stimulus projects that have yet to be awarded.
Questions
1. Did the initial exclusion of Canadian firms from bidding on certain state stimulus projects
funded by the U.S. government impact firms in your riding? Did such firms pressure the
government in negotiating the resulting agreement? On balance, do you think that more open
bilateral procurement would help or hinder firms in your district?
2. Is free trade in government procurement resulting from economic stimulus measures realistic?
Should taxpayers have the expectation that money spent on economic stimulus measures be used
to bolster the domestic economy? Are there any Buy Canadian provisions in stimulus program
spending?
3. Given the reluctance of Canadian provinces to sign on to the AGP in the past, what role did the
initial exclusion of Canadian firms from certain stimulus funding play in changing the game? Did
the provinces have other reasons for reexamining their participation in the AGP?
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U.S. Imports of Canadian Softwood Lumber65
Issue Definition
The U.S. lumber industry has long argued that imports of subsidized Canadian lumber were
injuring U.S. producers. In May 2002, after the U.S. lumber industry filed antidumping and
countervailing petitions to restrict imports, agency determinations of Canadian subsidies,
dumping, and injury to the U.S. industry led to a duty of 27% (later reduced) on most Canadian
softwood lumber imported into the United States. Canada challenged these findings under
NAFTA and before the WTO. Negotiations led to a seven-year Softwood Lumber Agreement in
2006 with Canadian export charges depending on U.S. lumber prices, and the United States
revoked the countervailing and antidumping orders. On February 26, 2009, a tribunal found that
four Canadian provinces had violated the Agreement in calculating 2007 quotas; the United States
rejected the Canadian offer of compensation, and on April 15, 2009, the United States began
collecting 10% ad valorem duties from the four provinces to compensate for the 2007 breach.
Background and Analysis
U.S. lumber producers have long expressed concerns about imports of subsidized Canadian
lumber. The current lumber agreement is termed Lumber IV, because it is the result of the fourth
dispute since 1981, with various findings of subsidy levels and agreements in the previous
disputes.
Tension between the United States and Canada over softwood lumber trade may be inevitable.
Both countries have extensive forest resources, but vastly different population levels and
development pressures; vast stretches of Canada are still largely undeveloped, while less area in
the United States (outside Alaska) remains relatively pristine. These differences have led to
divergent forest policies. In Canada, 90% of the forests are owned by the provincial governments,
which have allocated and priced timber to encourage development of the extensive timber
reserves and settlement of unpopulated areas. In the United States, 58% of timberlands are
privately owned, and private markets dominate the allocation and pricing of timber. U.S. federal
and other government-owned forests are regionally important, but the timber is typically sold in a
competitive market.
U.S. lumber producers assert that subsidies have given Canadian producers an unfair advantage in
the U.S. market. Canadian provincial stumpage fees (for the right to harvest trees) are asserted to
be subsidized, leading to lumber prices that are less than their fair market value. The provinces
generally use leases and administered fees to allocate and price timber. Administered fees are
unlikely to match market values, but determining whether the fees are below market values has
been controversial, because of differences in tree species, sizes, and grades; in measurement
systems; in requirements on harvesters; in environmental protection; and in other factors.
Log export restrictions in British Columbia are also alleged to be subsidies, because they assure
more supply (less competition for timber and thus lower costs) for Canadian producers. Evidence
65 Prepared by Ross W. Gorte, Specialist in Natural Resources Policy, Resources, Science, and Industry Division, and
Jeanne J. Grimmett, Legislative Attorney, American Law Division.
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from the U.S. Pacific Northwest, where private logs can be exported but public timber cannot,
indicates substantially higher prices for exported logs.
Injuries to U.S. lumber producers are difficult to establish decisively, although the U.S.
International Trade Commission (ITC) has found injury every time it has examined the issue.
Canada’s share of the U.S. lumber market has risen substantially, from less than 7% in the early
1950s to more than 33% since the mid-1990s. Under the 1996 agreement, the quantity of imports
continued to rise, but the market share was relatively stable. The impact of restrictions on U.S.
lumber prices is not easily estimated, but restrictions have probably put upward pressure on
prices.
Status of the Issue
In 2001, after the 1996 U.S.-Canada softwood lumber agreement expired, the U.S. Coalition for
Fair Lumber Imports filed countervailing duty and antidumping petitions, asking the DOC to
investigate Canadian imports again. The Department of Commerce issued final determinations of
subsidies on March 22, 2002. On May 3, 2002, the ITC determined that the U.S. lumber industry
was threatened with material injury by Canadian imports. A duty averaging 27% was imposed on
May 22, 2002.
Canada challenged each of the agency determinations under the North American Free Trade
Agreement (NAFTA) and in the World Trade Organization (WTO). The NAFTA panels largely
supported the Canadian positions. The WTO proceedings resulted in mixed decisions. Canada
was also concerned that the US$5 billion in estimated duties on softwood lumber collected by the
United States would eventually be distributed to U.S. lumber producers under the Continued
Dumping and Subsidy Offset Act (Byrd Amendment). Canada obtained a U.S. court decision,
however, holding that the Byrd Amendment did not apply to Canadian lumber imports.
On April 26, 2006, a tentative seven-year Softwood Lumber Agreement, with an optional two-
year renewal, was announced to resolve the dispute. The United States revoked the countervailing
and antidumping duty orders and returned about US$4 billion to the importers of record. The
remaining deposits (about US$1 billion) were split evenly between the members of the Coalition
for Fair Lumber Imports and jointly agreed-upon initiatives. Canada is collecting export charges
ranging up to 15%, depending on a weighted average lumber price, or up to 5% with volume
restraints. A surge mechanism would raise export charges if a Canadian region’s exports exceed
its allocated share. Lumber from logs harvested in the Atlantic Provinces, Yukon, Northwest
Territories, or Nunavut is exempt from the export charges. Disputes are to be resolved through
bilateral consultations, non-binding mediation, or binding arbitration in the London Court of
International Arbitration (now LCIA).
U.S. interest groups have questioned whether Canada is faithfully implementing the agreement.
The 2008 farm bill (P.L. 110-246) included a provision (§3301) establishing a softwood lumber
importer declaration program to verify and reconcile data on softwood lumber imports. In August
2007, U.S. officials requested a ruling from the London Court of International Arbitration (LCIA)
on export quota volumes and export tax levels. In March 2008, the Court ruled that Canada had
violated the export quota volumes for Manitoba, Ontario, Québec, and Saskatchewan for the first
six months of 2007, but was not required to collect taxes related to export surges from Alberta
and British Columbia during that period. To comply with the above ruling, an LCIA tribunal
issued a decision that Canada must collect an additional 10% ad valorem export charges from the
four provinces until C$68.26 million (US$54.8 million) had been collected on February 26, 2009.
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The U.S. Trade Representative rejected the Canadian offer of a compensation payment of
US$36.66 million, and on April 15, 2009, began collecting 10% duties on lumber from the four
provinces.
U.S. lumber producers and some members of Congress, including Senators Max Baucus and
Olympia Snowe, have urged the Administration to seek consultations under the SLA over certain
timber pricing practices in British Columbia. They claim that the BC government has been
classifying an increasing amount of its cut as salvage Grade 4 lumber and charging less for it than
better grades, resulting in a subsidy for Canadian timber processors. Canada attributes this
increase to an infestation of mountain pine beetles, but U.S producers dispute this, claiming that
BC has changed its grading procedures and producers are heating lumber prior to grading,
resulting in greater cracks and defects. On August 6, 2010, USTR Ron Kirk announced that he
would make a decision within a month on whether to launch consultation on the matter, and he
met with Canadian Ambassador Gary Doer on August 14. It was announced that U.S. and
Canadian officials would meet on September 1 to try to resolve the issue. Formal dispute
settlement proceedings could result if the 40-day consultation period does not result in resolution
of the dispute.66
Questions
1. The current dispute over U.S. imports of Canadian lumber has persisted for nearly 30 years. Do
Canadian producers have a significant cost advantage because of Canadian timber practices
and/or subsidies? Should Canadian practices be modified to enhance competition for timber? Do
the systems and situations vary sufficiently to warrant different responses to each Canadian
province? What might be the environmental consequences of various possible changes?
2. The 2006 agreement terminated the duties, returned most of the money collected, and
established price-dependent export charges on Canadian lumber. What changes are needed by
2013 to assure that the recent duties, challenges, and litigation are not repeated when the
agreement expires? What happens if some of the provinces make appropriate changes and others
do not?
3. Are the current oversight mechanisms sufficient to assure implementation of the agreement that
is acceptable to all parties? Are there ways to provide adequate and timely data to identify
possible violations (deliberate or unintentional) and thus the delay and cost of arbitration and
subsequent remedies? What approaches are feasible to compensate communities and workers for
injury from weak lumber markets without providing subsidies to the lumber industry? What
unilateral U.S. enforcement measures might be acceptable to Canada under the agreement?
66 “U.S. Holding Off on Softwood Lumber Complaint, to Meet with Canada September 1,” Inside U.S. Trade, August
27, 2010.
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Black Liquor67
Issue Definition
Tax incentives for renewable energy are often seen as necessary to encourage deployment and
adoption of what are newly developed technologies and processes. With renewable biofuels, the
concept also extends to considerations of displacing the use of existing fossil fuels so as to reduce
the greenhouse gas emissions associated with global climate change. The production of
renewable biofuels are not without controversy, as environmentally beneficial choices and
solutions are still being debated. While black liquor is generally seen as meeting U.S.
requirements for renewable electricity, how it meets requirement for use as a renewable fuel is
still a question.
Background and Analysis
Paper companies in the United States can no longer claim an alternative biofuel tax credit of
$1.01 per gallon for the use of “black liquor” that had been allowed under the 2008 Farm Bill.
Under a provision eventually added to the Health Care and Education Reconciliation Act of 2010
(P.L. 111-152), black liquor was disqualified from eligibility. Congress acted to exclude black
liquor from an estimated $24 billion in tax credits after news of a memorandum from the Internal
Revenue Service emerged indicating that black liquor could qualify for the credit. Eligibility for
black liquor under the biofuel credit had been uncertain prior to congressional action. Congress
also moved to exclude “tall crude oil” from the biofuel tax credit. Tall crude oil is made by
skimming the top layer from black liquor and adding acid. The resulting product can be used by
pulp and paper companies as fuel, or is sold to others as a base for paint or print ink.
Black liquor is a by-product of the paper production process comprised of mostly organic lignin
and inorganic pulping chemicals, and has long been used in the pulp and paper industry as a
source of energy. The pulping chemicals dissolve the lignin bonds holding together the cellulose
fibers in pulped wood, allowing these fibers to be made into paper products. While some paper
producers burn the black liquor directly, it is often processed in specialized boilers which burn the
organic components and allow the inorganic chemicals to be recovered from a smelt for reuse in
the pulping process. The heat from burning the black liquor is then used to make steam for
thermal processes in a paper mill, and can also be used to produce electricity for the mill in
combined heat and power applications. The organic components of black liquor can theoretically
be gasified to produce syngas, from which other higher value products and chemicals, such as
dimethyl ether (a potential diesel substitute) can be made.
Status of the Issue
Companies in the U.S. pulp and paper industry took advantage of an existing alternative energy
tax credit of $0.50 per gallon which allowed renewable fuels to be added to fossil fuels thus
reducing the proportion of fossil fuels in energy production. By mixing diesel fuel and black
liquor, companies in the pulp and paper industry were estimated to have benefited by as much as
67 Richard Campbell, Specialist in Energy Policy. Resources, Science, and Industry Division.
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$6 billion. The alternative energy tax credit expired at the end of 2009. But the effective date for
the exclusion under P.L. 111-152 was January 1, 2010, which means that pulp and paper
companies can still claim the tax credit for previous tax years.
In July 2010, the Internal Revenue Service issued a ruling that black liquor burned before
December 31, 2009, was still eligible for the separate cellulosic biofuel tax credit under certain
circumstances. The IRS ruled companies could amend their tax returns if they wished to claim the
cellulosic biofuel tax credit worth $1.01 per gallon (or double the amount available under the
alternative fuel tax credit). Pulp and paper companies could be eligible for as much as another
$500 million in tax benefits. The IRS has ruled that black liquor producers cannot claim both
credits for burning the same gallon of black liquor. But under certain circumstances, companies
can continue forward unused portions of the cellulosic biofuel tax credit up to 2015.
The original intent of both tax credits was to provide incentives for the domestic production of
alternative fuels and reduce U.S. dependence on fossil fuels. Firms in the Canadian pulp and
paper industry have seen the alternative energy tax credit as an unfair subsidy to the U.S. pulp
and paper industry, even though the program was clearly not created or intended for an industry-
specific subsidy.
Questions
1. Will Congress take action to “retroactively” disallow biofuels credits for black liquor under the
premise that such claims were not used in the way the provision was originally intended?
2. Will the action by Congress to terminate the tax credit for biofuel eligibility for black liquor
affect the prospect of developing gasification as a technical option for black liquor especially as
regards future biofuels production?
3. Is there a potential for filing of complaints under applicable trade agreements between the
United States and Canada with regard to the expired alternative energy tax credit?
Country of Origin Labeling68
Issue Definition
Mandatory country-of-origin labeling (COOL) for specified agricultural products took effect on
March 16, 2009. This was the culmination of a near decade-long legislative effort to arrive at an
accommodation that addresses the concerns of competing interests. Food retailers are now
required to label the country of origin for fresh produce (fruits and vegetables), meats, nuts, and
seafood, among other products. Canada and Mexico are major suppliers of live cattle and hogs
that are fed in U.S. facilities and/or processed into beef and pork in U.S. meat packing plants. As
the U.S. meat processing sector geared up to implement COOL, Canadian cattle and hog exports
to the U.S. market noticeably declined. Both countries expressed concern that this development
adversely affected their livestock sectors. Not satisfied with the outcome of consultations held
68 Prepared by Remy Jurenas, Specialist in Agricultural Policy, Resources, Science and Industry Division.
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with U.S. officials on their concerns, both Canada and Mexico are now using the World Trade
Organization (WTO) dispute resolution process to press their case.
Background and Analysis
Under the Tariff Act of 1930, as amended, most unprocessed agricultural commodities have long
been exempt from requirements that every import be clearly marked to indicate country of origin
for the “ultimate purchaser.” However, provisions in the 2002 farm bill (section 10816 of P.L.
107-171) require that retailers covered by the Perishable Agricultural Commodities Act (i.e.,
those which deal in at least $230,000 per year in produce—fresh and frozen fruits and vegetables)
begin to provide such information. Other covered commodities specified in the 2002 farm bill
were: ground and muscle cuts of beef, lamb and pork; seafood; and peanuts. Labeling is not
required if these commodities are ingredients in processed foods, or if they are sold in dining out
settings.
Passage of the initial COOL provisions in 2002 did not end debate over the value and efficacy of
mandatory COOL, particularly with regard to meats. COOL opponents argued that record-
keeping and verification costs will far exceed any perceived economic benefits to producers; that
smaller-sized farms and firms will have the most difficulty with compliance; that there is little
evidence consumers actually want labeling; and that COOL is a protectionist policy that
undermines free trade. Supporters countered that compliance would not be nearly as burdensome
as some large industry groups and USDA have portrayed it; that studies show U.S. consumers, if
offered a clear choice, will pay extra for fresh foods of domestic origin, thereby strengthening
demand and prices for them; and that consumers have a right to know where their foods were
produced. They pointed out that all but two of the North American cases of “mad cow” disease
(bovine spongiform encephalopathy, or BSE) occurred in Canadian-born cattle, yet the United
States is permitting the import of large quantities of Canadian beef and cattle. (COOL opponents
argue that country of origin labeling is a matter of marketing, not food safety, and that food safety
concerns are best addressed through science-based regulation.)
Initially scheduled to take effect on September 30, 2004, Congress postponed COOL
implementation until September 30, 2008 for all but seafood, because of ongoing debate. Some
issues were addressed in talks held among key players during consideration of the 2008 farm bill.
Compromises struck were incorporated into section 11002 of P.L. 110-246. These provisions
retained the implementation schedule, and added other commodities (chicken, goat meat, ginseng,
pecans, and macadamia nuts) to its coverage. However, several new types of label categories
were created that are intended to facilitate and simplify compliance in specifying the country or
countries of red meat products. For all covered commodities, the amended law also seeks to ease
recordkeeping and verification requirements, and to lower non-compliance penalties.
Canada is the leading source of U.S. food and agricultural imports, accounting for about 20% of
total import value. Its importance as a source reflects the close and growing economic integration
of the two countries’ markets. Many of these imported products are now covered by mandatory
COOL. The Canadian government argued for some time that COOL is a protectionist measure,
and in late 2009 initiated a formal complaint at the WTO challenging it as trade distorting under
existing trade agreements.
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Status of the Issue
Enactment of the amended COOL provisions allowed USDA to proceed to issue rules to
implement them. The August 2008 interim rule for meat labeling requirements generated the most
controversy, in large part because of the steps that U.S. feeding operations and packing plants
would have to adopt to segregate, hold, and slaughter foreign-origin livestock from U.S.
livestock. Concerned with apparent changes in normal livestock trade flows in reaction to the
proposed rules and questioning COOL’s legality under trade rules, Canada on December 1, 2008,
filed a request for formal WTO consultations on COOL with the United States. Bilateral
consultations were held twice, but failed to resolve differences. On October 7, 2009, Canada
requested the establishment of a WTO dispute settlement panel to look into its claims. On
November 19, 2009, the WTO agreed to establish a panel to examine this and Mexico’s nearly
identical case on COOL. This panel is scheduled to hold its first meeting on September 14, 2010,
to hear each country’s arguments, and its decision may be made by mid-2011.
Canada in its filing asserts that COOL is inconsistent with several WTO-related trade
commitments, including those providing that imports must be treated no less favorably than
products of domestic origin; that laws on marks of origin should not damage imports, reduce their
value, or unreasonably increase their cost; and that laws, rules, and procedures on country of
origin should not “themselves” create or disrupt international trade. Canadian officials stated that
the COOL requirements are “so onerous” that when implemented, Canadian exporters of cattle
and hogs were discriminated against in the U.S. market. U.S. officials regretted that the
consultations did not resolve Canada’s concerns, and stated their belief that U.S. implementation
of COOL provides consumers with information that is consistent with WTO commitments. They
noted that countries had agreed that country of origin labeling was legitimate policy long before
the WTO was created, and that other countries also require goods to be labeled with their origin.
In December 2009, 25 senators wrote to Obama Administration officials to express their support
for implementing COOL according to congressional intent, stating that the program is
nondiscriminatory in its requirements that both domestic and imported goods be labeled with
their origin. They also noted that 45 other countries (including Canada and Mexico) implement
programs that provide country of origin information to consumers.
Questions
1. Reports in meat trade publications have suggested that the final COOL requirements have
strained marketing relationships between Canadian and U.S. livestock producers and meat
processors. How much has this tension altered trade between the United States and Canada, and,
if so, in what way? What economic adjustments if any have occurred in light of the decrease in
Canadian hog and cattle exports to the United States?
2. In general, how will COOL likely affect the composition and economic viability of both the
cattle/beef and hog/pork sectors in North America?
3. How does Canada’s country of origin labeling program for food products compare to that
implemented under the U.S. COOL program?
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The Canadian Auto Sector69
Issue Definition
In 2009, the governments of the United States, Canada, and the Province of Ontario were faced
with the bankruptcy of General Motors (GM) and Chrysler, major employers on both sides of the
border. All three governments provided financial assistance to these two automakers to facilitate
their restructuring. These government investments in GM and Chrysler sustained the companies
so they could exit bankruptcy to regain their footings as global automakers. Along with Ford’s
own, separate private restructuring, these actions of the Detroit 3—GM, Ford and Chrysler—are
reshaping the Canadian auto market.
Background and Analysis
The U.S. and Canadian automotive industries have been highly integrated for decades. The
landmark U.S.-Canada Automotive Products Trade Agreement of 1965 (also known as the Auto
Pact) was one of the first sectoral free trade agreements, allowing automotive vehicles and parts
to move duty-free across the border. The Auto Pact, which guaranteed that for every five cars sold
in Canada, three would be assembled there, boosted car production in Canada, making it the
largest manufacturing sector in that country, displacing the paper and pulp industry. The
elimination of tariffs allowed U.S. auto companies to build plants on both sides of the border that
were large enough to serve both countries efficiently.
The Auto Pact shaped U.S.-Canadian auto trade until it was superseded by the U.S.-Canada Free
Trade Agreement (CUSFTA) in 1989 and the North American Free Trade Agreement (NAFTA) in
1994. NAFTA’s major contribution to auto trade was to bring Mexico into the relatively open
Canada-U.S. auto production market and to tighten rules of origin pertaining to North American
content requirements. After each of these agreements went into effect, coordinated production on
both sides of the border increased, as did bilateral automotive trade.
The Canadian auto industry produced 1.5 million vehicles in 2009, down from annual production
of over 2 million vehicles in 2008 and earlier, due to the recession. It was the 11th largest auto-
producing nation in 2009, slightly larger than the United Kingdom (1.1 million vehicles) and
smaller than Mexico (1.6 million). Canadian economic growth prospects are tied in part to the
United States, and the latter’s apparent slowdown in the second quarter may affect Canada as
well. So far this year, 2010 Canadian auto production is forecast to reach 2 million vehicles, a
37% increase over depressed 2009 production levels, and then reach about 2.2 million vehicles in
2011, according to IHS Global Insight.
In 2009, auto sales in Canada were 1.5 million units, down from 1.6 million units in 2008.
According to Automotive News, the Detroit 3’s share of sales fell from 50% in 2008 to 45% last
year. Sales from Japanese companies rose from 35% to 39%; sales of European models fell from
9.3% to 8.3%, while Korean vehicles rose from 5.7% to 7.0%.
69 Prepared by Bill Canis, Specialist in Industrial Organization & Business; Resources, Science, and Industry Division.
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In 2009, the auto industry produced 14% of Canada’s manufacturing output and accounted for
23% of its manufactured exports, according to Industry Canada, a government agency. It is by far
Canada’s largest industrial sector. Last year the auto industry in Canada employed 150,000 people
directly, and 340,000 indirectly, including parts suppliers and auto dealers. Nearly a fifth of
General Motors (GM), Ford, and Chrysler’s North American production capacity is in Canada,
principally in Ontario. In 2009, of the 1.5 million light vehicles produced in Canada, IHS Global
Insight notes that the Detroit Three accounted for 59%—approximately 22% by GM, 16% Ford,
and 21% Chrysler. Moreover, the automotive parts market, or so-called aftermarket, is reportedly
the largest retail sector in Canada, ahead of clothing, food, furniture, and pharmaceuticals.
The Detroit 3’s Canadian facilities are unionized, while Toyota and Honda have assembly plants
in Ontario that are non-union. The Japanese transplants have a lower cost structure than the
Detroit 3, in part because of long-standing wage differentials. This may be changing. A 2007
contract and 2009 amendments to that contract negotiated between GM and Chrysler and the
UAW (and its Canadian counterpart, the Canadian Auto Workers, CAW) represented a major
break from past labor agreements and may, in time, achieve greater wage parity between the
domestic and foreign-owned manufacturers. Workers at GM and Chrysler also agreed not to
strike until 2015. (Ford employees are covered by a different contract.)
In late 2008, the U.S. and Canadian auto industry—along with Europe and Japan—was caught in
a global economic recession and credit crisis that caused auto sales to fall sharply. General
Motors and Chrysler turned to the U.S. and Canadian governments for assistance in the final
months of 2008. In December 2008, President Bush announced a plan to loan $17.4 billion to GM
and Chrysler to prevent any near-term bankruptcy and to help them restructure as more viable and
competitive companies in the long run. On the following day, the Canadian government and
province of Ontario responded to the U.S. auto bailout by pledging $3.3 billion in emergency
loans to the local subsidiaries of GM and Chrysler.
In March 2009, the U.S., Canadian and Ontario governments announced that the were rejecting
the two automakers’ viability plans and requests for further assistance, giving GM 60 days and
Chrysler 30 days to revise their plans and forge agreements with all stakeholders. They were
unable to get all creditors to agree and so both companies filed for bankruptcy, with new entities
being incorporated in the summer of 2009, leaving many liabilities and some assets behind in
bankruptcy. GM shed several of its brands, including Pontiac which accounted for as much as
25% of its sales in Canada.
The other Detroit 3 automaker, Ford Motor Company, did not seek or receive government
financial assistance because it had independently restructured the company and refinanced its
debt before the recession and credit crisis. The changes it made in its operations are widely
considered to have been as equally extensive as GM’s and/or Chrysler’s.
Status of the Issue
GM and Chrysler went through an expedited bankruptcy, just over 40 days for each company.
Because the credit markets were still tight in 2009, the only source of financial aid for them
through the bankruptcy proceedings was support from the U.S., Canadian, and Ontario
governments. Had these governments not provided financing, it is likely that both companies’
assets would have been liquidated during bankruptcy and the assets sold to the highest bidders.
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The U.S. government has provided $50.2 billion to GM and $12.8 billion to Chrysler, through the
federal Troubled Asset Relief Program (TARP). The Canadian government and the government of
Ontario provided loans of $3.02 billion to Chrysler and $9.5 billion to GM. All of these
governmental loans were converted into a mix of equity and loans. The governments received
these equity stakes in the companies: the U.S. government owns 60.8% of GM and 9.85% of
Chrysler; the Canadian and Ontario governments own 11.7% of GM and 2.46% of Chrysler. In
addition to these equity holdings, GM had loans of $6.7 billion from the U.S. Treasury and $1.4
billion from Canada. Although not due until 2014, GM paid off the $8.1 billion in combined U.S.
and Canadian government loans in April 2010. The three governments may recoup the rest of
their investment in GM after it issues an initial public offering (IPO) later this year. Chrysler has
not repaid its loans and is not likely to offer an IPO before 2011.
Questions:
1. Will the Detroit 3 automakers—GM, Ford and Chrysler—be successful in Canada now that
they have each restructured? Will they be able to add to their current 59% share of Canadian
production?
2. While General Motors has repaid an outright loan to the U.S., Canadian, and Ontario
governments, how will these same governments fare when they seek to sell their ownership
stakes after GM issues after an expected IPO later this year?
3. Hyundai-Kia’s share of the Canadian market has grown in recent years, while the South
Korean market remains largely closed to North American-built vehicles. How will this sales trend
affect Canada’s interest in a proposed free trade agreement with South Korea?
The Canadian Steel Sector70
Issue Definition
The impact of the global economic downturn and the financial crisis that erupted in the summer
of 2008 has had substantial negative effects on most manufacturing industries, including the
North American steel industry. An earlier slump in steel, which occurred in the 1990s, led to
numerous bankruptcies and takeovers of many U.S. and Canadian steel makers. Almost all of the
major steel makers in Canada are now foreign owned, so decisions to close or idle plants or
reduce production in Canada (but not elsewhere), inevitably affect national economic and
political interests.
Pittsburgh-based U.S. Steel moved to idle many of its Canadian operations in 2009 when steel
orders fell precipitously. The Canadian government, the United Steel Workers, and local steel
manufacturer(s) took legal actions against it under the Investment Canada Act. The Canadian
government alleges that U.S. Steel is not abiding by commitments it made under the act when it
acquired the Canadian steelmaker, Stelco, in 2007. Legal proceedings are ongoing.
70 Prepared by Rachel Tang, Analyst in Industrial Organization & Business; Resources, Science, and Industry Division.
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Background and Analysis
During the 1990s and the first decade of the 21st century, many U.S. and Canadian steel
companies experienced a downturn that led to a major restructuring and reorganization of the
North American steel industry. In 2009, the Canadian steel industry looks very different than it
did in 2000. The major integrated steel producers, including Dofasco, Stelco, and Algoma Steel,
are now owned by international companies. Dofasco was acquired by Luxemburg-based Arcelor
in 2006. At about the same time, Arcelor agreed to merge with Mittal Steel of Rotterdam. Dofasco
is now a subsidiary of ArcelorMittal, the world’s largest steelmaker. In 2006, Mittal Steel
acquired several Stelco subsidiaries and U.S. Steel purchased the remaining part of Stelco, which
was renamed U.S. Steel Canada Inc. Algoma Steel was purchased by Essar Steel of India in 2007,
and operates as Essar Steel Algoma Inc.
The Canadian minimill steel sector also went through a restructuring process. Minimills produce
steel from scrap metal in electric arc furnaces (EAFs). In 2002, the Canadian firm, Co-Steel,
merged with Ameristeel, the North American subsidiary of Gerdau S.A., of Brazil. Gerdau’s
North American operations were renamed Gerdau Ameristeel and are based in Tampa, FL.
Gerdau Ameristeel is the second largest minimill steel producer in North America after U.S.-
based Nucor. In 2008, Russia’s Evraz Inc. S.A. acquired another major Canadian minimill steel
maker, IPSCO Canada.
The North American steel industry struggled from 1997 through 2002. In March 2002, President
Bush imposed safeguards in response to surging imports of steel. One goal of safeguards was to
effect a restructuring of the domestic steel industry. To a great extent, that restructuring has been
achieved. There are now two dominant players among integrated steel mill companies in the
United States and North America, and two clear market leaders among the minimill producers.
Moreover, the leading North American and global producer, Mittal Steel, in 2006 acquired the
global number-two producer, Arcelor. The recovery of pricing power in the domestic industry
may be attributable to industry consolidation, as well as to rising global demand spurred, in large
part, by China. Ironically, the establishment of industry pricing power, plus the rise of global
demand and steel prices and the falling exchange rate of the dollar, have also made establishment
of new production facilities in the United States an attractive proposition. After the removal of
safeguards, steel prices generally moved upward through August 2008, when the benchmark price
of hot-rolled steel reached nearly $1,200 per metric ton (MT)—up from $222 per MT in 2002.
Starting in September 2008, the global economic crisis caused steel production and prices to fall
precipitously. Like many other industrialized countries, the impact of market downturn was felt
by all the major steel consuming sectors in Canada—automotive, construction, manufacturing,
appliance, and energy. Furthermore, given the overall difficult economic environment, the steel
export market was also lackluster.
In 2009, the United States, Canadian steel’s biggest export customer, suffered a major setback:
U.S. crude steel production dropped more than 36% from the 2008 production level to 58 million
metric tons, with steel mills running at a capacity utilization rate slightly over 50%. During the
first half of 2009, the overall capacity utilization rate in U.S. steel mills lingered in the low to
mid-40% range.
Canadian steel production also experienced a sharp drop in 2009, to approximately 9 million MT
of crude steel, nearly 40% less than the 15 million MT produced in 2008. In 2009, steel-making
capacity utilization rate in Canada was about 43%. Pittsburgh-based U.S. Steel moved to idle
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much of its Canadian operations in March 2009, largely because of low demand for steel.
Affected U.S. Steel plants in Canada included the flat-rolled steel plant in Hamilton, Ontario,
known as the Hamilton Works, and Lake Erie Works in Nanticoke, Ontario. Some of its U.S.
operations were also affected by the crisis. U.S. Steel met strong resistance from the Canadian
government and the local United Steelworkers union (USW), which raised questions about why
more facilities in Canada were affected than in the U.S. On May 5, 2009, Canadian Minster of
Industry, Tony Clement, sent a demand letter to U.S. Steel under Section 39 of the Investment
Canada Act (ICA) , asking the company to comply with its undertakings (its alleged contractual
commitments):
When U.S. Steel acquired Stelco Inc. in 2007, it committed to a series of undertakings
regarding, among others, capital expenditures, research and development and production,”
Mr. Clement said. “I am concerned by the actions of U.S. steel in cutting operations in
Canada and by the impact this have on its workers. While I recognize that these are
challenging economic times, we expect the company to live up to its commitments.
A demand letter is the first step in the enforcement process under the Investment Canada Act. If a
company is found in violation of the act, it could be forced to sell its Canadian operations or pay
fines of C$10,000 per day. U.S. Steel had 10 days to respond to the letter, but noted that “since all
of the communications between the Minister and U.S. Steel on this subject are required to be
confidential under the Investment Canada Act, we cannot comment on the substance of those
communications.” (American Metal Market, “Canada taking USS to court over closings,” July 20,
2009.)
In July 2009, after reviewing U.S. Steel’s response, the Canadian government took U.S. Steel
Corp. to the Federal Court of Canada, asking the Court to order appropriate measures to remedy
the situation.
Status of the Issue
U.S. Steel moved to file a challenge to the Investment Canada Act (ICA) in November, 2009,
claiming that certain provisions of the law violate its constitutional rights. Among them is the
stipulation that companies that fail to comply with promises made under the ICA must pay fines
or must divest their assets, but are not given a chance to mount a proper defense. It also argued
that the penalty of C$10,000 a day was akin to criminal punishment. The Canadian government is
seeking the dismissal of U.S. Steel’s challenge and “is trying…to force U.S. Steel to either
operate its Canadian assets or sell them to a party that will operate them.” (American Metal
Market, “Canada fights USS legal challenge,” December 15, 2009.)
On April 15, 2010, U.S. Steel Canada announced that USW Local Union 8782 had ratified a
three-year labor contract for employees at U.S. Steel Canada’s Lake Erie Works. The deal will
allow U.S. Steel to restart production at the facility based on improving steel demand. Production
at Hamilton Works had restarted earlier. On April 28, 2010, U.S. Steel Canada announced that it
has entered into an agreement to sell its bar mill and bloom and billet mill at its Hamilton Works
to Max Aicher (North America) Inc., a wholly owned subsidiary of Max Aicher GmbH & Co. KG
of Germany. Max Aicher had previously entered into talks to purchase the bar and bloom mills in
2007, prior to their purchase by U.S. Steel. The transaction is subject to government approval and
other unspecified conditions.
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On June 14, 2010, a federal court ruled in favor of the Canadian government, upholding a portion
of the Investment Canada Act being challenged by U.S. Steel as unconstitutional. U.S. Steel
subsequently appealed the decision. On July 26, 2010, a federal appeals judge in Canada ruled
that the case by the Canadian government against U.S. Steel Corp. can proceed, allowing the
battle for control of Canadian steelmaking operations to continue. Many observers expect the case
to eventually proceed to the Supreme Court of Canada.
Questions:
1. To what extent can American investors be assured that economic and market conditions that
affect their Canadian businesses will not be subject to legal action under the Investment Canada
Act?
2. With the significant restructuring of the North American steel sector after 2002 and the collapse
of global steel markets in 2008 and 2009, should the U.S., Canadian, and Mexican governments
begin discussions on a common steel policy that will protect the North American market from
import surges?
3. Do you believe that the Investment Canada Act is working appropriately? Does the perception
that an act regulating foreign investment is a tool of industrial policy cause you any concern?
Intellectual Property Rights71
Issue Definition
The United States contends that Canada’s protection and enforcement of intellectual property
rights (IPR) are inadequate and do not meet international standards. Trade in IPR-infringing
products within Canada and the transit of such goods through Canada may have negative
commercial, health, safety, and other consequences. Some U.S. pharmaceutical manufacturers,
regulators, and other groups have expressed concern about the diversion of prescription drugs
from Canada into the United States in cases where the drugs may be sold legally in Canada but
are not approved for sale in the United States by the U.S. Food and Drug Administration (FDA).
Areas of bilateral engagement on IPR include Canada’s reform of its copyright regime, lack of
implementation of the World Intellectual Property Organization (WIPO) Internet treaties, and
enforcement system.
Background and Analysis
Protection and enforcement of IPR is important to bilateral relations because of the high levels of
trade between the United States and Canada. Bilateral commitments on IPR exist in the North
American Free Trade Agreement (NAFTA). As members of the World Trade Organization
(WTO), both countries are signatories to the Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS), which set minimum standards for IPR protection and enforcement.
71 Prepared by Shayerah Ilias, Analyst in International Trade and Finance, Foreign Affairs, Defense, and Trade
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Presently, Canada and the United States are among the nearly 40 countries negotiating the Anti-
Counterfeiting Trade Agreement (ACTA), a new international agreement which would build on
the TRIPS Agreement.
Special 301 Watch List
In 2010, the Office of the U.S. Trade Representative (USTR) again placed Canada on its Special
301 “Priority Watch List” (PWL), a designation of criticism for a country’s inadequate IPR
protection and enforcement. The USTR cited ongoing issues with Canada’s copyright reform and
IPR enforcement efforts at the border. USTR first placed Canada on the PWL in 2008. Canada
previously had been on the “Watch List,” the mildest category of criticism for a country’s IPR
regime, since 1985. Some supporters of Canada’s IPR regime assert that the Special 301 process
is overly industry-driven and that Canada’s piracy rates are significantly lower than those of other
countries on the PWL. Some industry groups maintain that Canada’s placement on the PWL
accurately reflects inadequacies in Canada’s IPR regime.
WIPO Internet Treaties
The WIPO Copyright Treaty and the Performance and Phonograms Treaty (the “WIPO Internet
treaties”) set minimum standards, agreed upon internationally, for IPR protection and
enforcement in the digital environment. Canada ratified the WIPO Internet treaties in 1997, but
remains one of few developed countries that has not brought its laws into compliance with the
treaties. The United States implemented the treaties in 1998 through the Digital Millennium
Copyright Act (DCMA) (P.L. 105-304), and has called on Canada to implement an equivalent of
the DCMA.
Copyright Legislation Reform
The Canadian government periodically has attempted to overhaul its domestic copyright regime
to bring domestic law in line with international standards. Some copyright-based industry and
other groups assert that Canada does not sufficiently combat online piracy or the circumvention
of technological measures that protect copyrighted works. Some maintain that, in addition to
focusing on commercial piracy, Canada also should prosecute retail piracy, which takes place on a
smaller scale but can still contribute to significant copyright losses. Others, including consumers
and Internet service providers (ISPs), call for greater exceptions to copyright for educational,
research, and other purposes to promote the free flow of information and innovation.
In June 2010, the Canadian government introduced the Copyright Modernization Act (Bill C-32)
to amend the current copyright law, calling the new bill a “common sense balance between the
interests of consumers and the rights of the creative community.” Among its provisions, the bill
incorporates the WIPO Internet treaties into domestic law; introduces provisions prohibiting the
circumvention of technological protection measures (“digital locks”); clarifies the roles and
responsibilities of ISPs for the copyright infringements of their subscribers; includes a “notice
and notice” provision (a copyright holder notifies the ISP that a subscriber has made available or
accessed content without authorization, and the ISP passes on the notification to the subscriber,
but takes no subsequent action to remove the content); permits the copying of legally obtained
content onto other devices provided it does not circumvent digital locks (“format shifting”);
provides expanded “fair dealing” exceptions—a concept similar to “fair use” in the United
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States—for education use, parody, and satire; and lowers statutory damages in cases of non-
commercial infringement from $500-$20,000, as in current Canadian law, to $100-$5,000.
Bill C-32 was preceded by public consultations conducted by the Canadian government, from
July 2009 through September 2009, on proposed reforms to Canada’s copyright laws. While some
applaud the government for consulting with public sector groups, others argued that the
consultations were not representative of Canadian demographics and lacked transparency and
accountability. Bill C-32 represents the third attempt in five years by the government to introduce
legislation to reform its copyright law. Prior bills introduced in June 2008 (Bill C-61) and June
2005 (Bill C-60) failed to advance before prior dissolutions of Parliament.
IPR Enforcement
Presently, the Canada Border Services Agency (CBSA) is not authorized to seize products at the
border that are believed to be pirated or counterfeit without a court order, which requires detailed
information. Some contend that this lack of authority limits the effectiveness of IPR enforcement
in Canada. IPR-infringement prosecutions are believed to be rare because of a lack of legal
professionals dedicated to IPR and a lack of technical expertise. The United States contends that
the enforcement penalties imposed by Canada do not serve as sufficient deterrents for future IPR
infringement. IPR enforcement issues are being discussed in the context of the ACTA
negotiations and reportedly in the Comprehensive Economic and Trade Agreement (CETA)
negotiations between Canada and the European Union.
Access to Medicines
Through Canada’s Access to Medicines Regime (CAMR), Canada was one of the first countries
to adopt a WTO framework that allows eligible developing countries with insufficient
manufacturing capacity to import generic versions of patented drugs or medical devices, subject
to various WTO notification, quantity, and safeguard requirements. Since its implementation in
2004, Canada has utilized the CAMR three times to issue a compulsory license for the production
of an anti-retroviral HIV/AIDS drug combination by a Canadian-based generic drug manufacturer
for export to Rwanda. While some contend that the CAMR is an effective framework for
increasing access to medicines in developing countries, others consider its requirements to be
excessively burdensome.
In order to increase U.S. access to more affordably priced medicines, legislation that would allow
Americans to import prescription drugs from foreign countries without personal use was
introduced in the 111th Congress. If such provisions were passed, Canada likely would be a
leading source of so-called parallel imports of prescription drugs. While some U.S. consumers
and other groups support parallel importation because it may increase access to less expensive
drugs, others argue that it does not address issues in U.S. pricing of drugs. Others, including some
drug manufacturers and regulators, raise health and safety concerns. From the Canadian
perspective, some argue that U.S. importation of Canadian drugs may reduce the supply of
medicines, leading to higher prices in Canada.
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Questions
1. What issues have arisen in developing legislation to implement the WIPO Internet treaties?
What is Canada’s vision of a fair and balanced copyright law? How could Canada’s
implementation of the WIPO Internet treaties differ from the DCMA?
2. What measures is Canada currently taking to address trade and transshipment of pirated and
counterfeit goods? What steps can Canada undertake to improve IPR border and domestic
enforcement? What can the United States do to assist Canada in improving IPR enforcement?
3. How does Canada view the U.S. Special 301 process? How does the Special 301 process and
the recent elevation of Canada to the PWL affect bilateral relations? If passed, to what extent
might the Copyright Modernization Act affect Canada’s placement on the Special 301 list?
4. Estimating IPR infringement levels and the associated commercial impact can be challenging.
The United States is working to improve its methodology and data collection efforts. Is Canada
engaged in similar efforts and, if so, what are they?
5. What steps has Canada taken to promote international protection and enforcement of IPR?
What are the opportunities and challenges that Canada sees in the ACTA?
6. How does Canada view legislation proposed by the United States to allow the importation of
drugs from Canada?
Electric Reliability, Trade, and Access to Renewable
Power72
Issue Definition
The electric power grids of the United States and Canada are physically connected. Consequently,
electric power reliability problems can easily cross the international border. This was
demonstrated by the 2003 power blackout, which originated in Ohio and eventually spread into
eastern Canada and the northeastern United States. The United States and Canada are therefore
mutually dependent for the reliable operation of their common electric power systems. The
interconnected grid also creates opportunities for trade and joint expansion of the use of
renewable power.
Background and Analysis
There are three components of electric power delivery: generation by power plants, transmission
over long-distances by high voltage power lines, and final delivery at low voltage by distribution
lines. The transmission lines that constitute the North American power grid cross state and
international boundaries. The U.S. and Canadian grids are, in fact, inextricably linked:
72 Prepared by Richard Campbell, Specialist in Energy Policy.
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• At the broadest level of organization, the North American grid is divided into
regional “interconnections” within which power moves freely (the links between
the regions are very limited). The large Eastern and Western Interconnections
cover most of the contiguous United States and the heavily populated regions of
Canada.
• At the level of major transmission lines, the Canadian grid has evolved by
building south from heavily populated areas to connect with U.S. generation and
load. Consequently, while the grid in the conterminous United States is a web
crisscrossing the lower 48 states, the Canadian backbone system consists of
north-south lines closely linked to the United States. More electricity actually
moves north and south between the United States and Canada than east and west
between Canadian provinces.
• In terms of system reliability, as discussed further below, the North American
Electric Reliability Corporation (NERC) has responsibilities for the reliable
operation of the power grid in both countries. Three of the eight regional
reliability entities through which NERC performs much of its work extend from
the United States into Canada and cover that nation’s entire southern tier.
Reliability
In reaction to the 2003 blackout, the Energy Policy Act of 2005 (P.L. 109-58) required the Federal
Energy Regulatory Commission (FERC) to designate an Electric Reliability Organization (ERO)
charged with ensuring the reliability of the bulk power system, largely by issuing mandatory
reliability standards. In 2006 FERC selected NERC for this role (NERC is an industry
organization whose reliability recommendations had been voluntary prior to its designation as the
ERO). NERC’s members include Canadian power companies and it has memoranda of
understanding (MOU) with Canadian provinces and the Canadian federal government to help
coordinate reliability activities. However, NERC does not have the same statutory authority in
Canada as in the United States. The MOU between the Canadian National Energy Board (NEB)
and NERC recognized NERC as the ERO for the Canadian part of international transmission lines
but not for lines located entirely within Canada’s borders (which are under provincial, not federal,
regulation). NERC currently has agreements with most Canadian provinces that make, or will
make in the future, NERC’s reliability standards mandatory and enforceable.
Transmission capacity and congestion issues that can impair reliability and increase power costs
exist in the United States and Canada, and the solution is often to construct new transmission
capacity or enhance existing facilities. Many transmission projects are under construction or
planned in both nations. However, transmission planning and construction in the United States
and Canada face similar challenges, particularly for long-distance projects. These challenges
include permitting and siting approvals that often involve multiple jurisdictions, and finding the
funding for the large investments in transmission (and power generation) that will be needed to
meet demand growth. Two international transmission projects of note include
• The planned Montana-Alberta Tie Line project, which would be the first
transmission link between that state and province. This is a 214 mile, US$213
million project that is expected to facilitate the export of wind power from both
regions and improve transmission system reliability. The project is being partially
financed by funding provided by the American Recovery and Reinvestment Act.
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• A proposed high capacity transmission line to ship up to 1,200 megawatts of
hydroelectric power from Québec to New England. Although this project has
received preliminary approval from the U.S. Federal Energy Regulatory
Commission, its future is uncertain because declining power prices in the United
States (linked to low natural gas prices) may make the project uneconomical for
the Canadian partner in the venture, the large utility Hydro-Québec.
Another Canadian project, the Northwest Transmission Line planned for northern British
Columbia, may eventually connect southeastern Alaska to part of the Canadian power system.
Trade and Renewable Energy Development
United States is a net importer of electricity from Canada and the imports have recently been
increasing, from 17.7 terawatt-hours (Twh) of net revenue purchases in 2006 to 32.2 Twh in 2008
and 33.2 Twh in 2009. From the U.S. perspective, while these imports can be locally important
(e.g., in New York and New England), on a national basis they are very small, equivalent to 0.8%
of total U.S. electric power generation (3,951 Twh) in 2009. Electricity trade is more significant
from Canada’s standpoint. Canada generated 575 Twh of electricity in 2009. Total revenue sales
of power to the United States in 2009 of 51.1 Twh were therefore equivalent to 9% of domestic
supply, and revenue purchases from the United States of 17.9 Twh were equivalent to 3% of
domestic supply. Canada typically exports 6% to 10% of its total electricity generation to the
United States.
The United States relies on coal for about half its electricity production, while Canada derives
about 75% of its electricity from “clean energy” sources (i.e., hydropower, nuclear and wind
energy). Electricity trade between the countries is likely to become intertwined with renewable
energy development and transmission planning issues. Both nations currently have policies for
the increased use of renewable power. The United States and Canada have established a “Clean
Energy Dialogue” (CED) to facilitate the development of low carbon energy sources. Elements of
the CED include, among other things, collaboration on: Expansion and modernization of the
North American transmission grid to improve reliability and facilitate trade in low carbon power,
advancement of smart grid technology, and development of electricity storage technology.
Canadian sources of renewable power may have the potential to reduce the need to build new,
long-distance transmission projects (which can take up to a decade or more to permit and
construct) in the United States. For example, imports of hydropower from Québec into New
England and New York, using new but relatively short power lines, have been suggested by the
transmission system authorities in those regions as an alternative to building power lines to
Midwestern wind farms. However, as discussed above, one of these projects has been thrown into
question by declining natural gas and power prices. Disputes at the state or provincial level can
also complicate energy project development. The future potential development of unconventional
gas resources (i.e., from coal bed methane and tight shale formations) in both the United States
and Canada could have a major impact on technology and energy choices in both countries.
In the United States, the intersecting issues of renewable power development, transmission
system expansion and reliability, and long-standing difficulties in multi-state permitting of new
projects, has spurred suggestions for new regulatory and planning processes. The planning
element of some proposals envisions creating transmission “master plans” on a wide geographic
scope to facilitate renewable energy development and other purposes. While these proposals are
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limited to planning within the United States, they will inevitably have an impact on Canada
because of the grid connections and the much larger size of the U.S. power system.
Status of the Issues
Reliability: NERC and FERC are continuing a process of developing and implementing
mandatory reliability standards for the grid, with cybersecurity a growing concern. In Canada, the
National Energy Board is reportedly working with provincial authorities on implementation of
mandatory reliability standards, although it is not clear if in all cases these will be the same as the
NERC standards or whether NERC will function as the ERO in every province.
Trade and Renewable Energy Development: The 111th Congress is considering legislation that
would create transmission planning and expedited permitting processes, aimed in large part at
renewable energy development. The proposals could facilitate transmission development for
enhancing reliability. In Canada, current efforts appear to be more focused on regulatory
coordination than regional transmission planning.
Questions
1. Will Canadian federal and provincial regulators approve and enforce NERC electric reliability
standards? Without identical standards in the United States and Canada, the reliability of the
electric power system could be reduced.
2. Given that the United States and Canadian power grids are integrated, what steps should be
taken to coordinate transmission planning and development of smart grid protocols? Is this an
area for NERC to establish a formal leadership role?
3. To what degree is Canada interested in exporting renewable power to the United States, or
importing renewable energy from this country, rather than reserving these resources for domestic
consumption?
4. How can the United States and Canada effectively resolve energy development issues that may
involve both federal and state/provincial authorities? Given the likelihood for increasing energy
integration, should a formal body be instituted to oversee energy trade and energy security issues?
U.S. Energy Security and Canadian Oil Sands73
Issue Definition
Canada ranks as the United States’ number one source of imported crude oil and thus plays an
important role in U.S. energy security. Canada’s oil sands make up an increasing proportion of its
petroleum production, and Canada’s oil sands producers continue to look to the United States as
the major market for their heavy oil exports. Of the approximately 2.0 million barrels per day
(mbd) of crude oil Canada has exported to the United States in 2010, approximately 50% is
73 By Robert Pirog, Specialist in Energy Economics, Resources, Science, and Industry Division.
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delivered to the Midwest. This region’s current capacity to process this type of crude oil, and
planned refinery expansion coupled with possible new refinery construction, places it in a
position to receive increased heavy oil exports from Canada. Another possibility for processing
additional Canadian heavy oil is expanded capacity in refineries along the U.S. Gulf coast.
Although U.S. refinery capacity is forecast to increase from 17.6 mbd in 2010 to nearly 19.3 mbd
in 2030—a 1.7 mbd increase, the deteriorating economics of the refining industry may bring these
projections into question. In 2009-2010, the refining industry has been characterized by plant
closures and divestiture. Actual, as well as projected, capacity expansion may not be enough to
keep up with Canada’s projected increase in oil sand production, especially if the investment
climate continues not to warrant expansions to include upgrades for heavy oil processing. Canada
is also pursuing additional refinery capacity for its heavier oil. Refinery expansions based on the
use of heavy oils will have environmental effects, and Congress will continue to face controversy
over the balance between energy security and the environment. In addition, investment and
production plans are likely to be altered by the reduced demand for petroleum products associated
with the ongoing effects of the economic recession that began in the last quarter of 2007.
Another possible impediment to expanded heavy oil use is Section 526 of the Energy
Independence and Security Act of 2007 (P.L. 110-140) that prohibits federal procurement of an
alternative or synthetic fuel “unless the contract specifies that the lifecycle GHG emissions are
less than or equal to such emissions from the equivalent conventional fuel produced from
conventional petroleum sources.” The provision is intended to ensure that federal agencies are not
spending taxpayer dollars to promote new fuel sources that will exacerbate global warming, and
would apply to fuels derived from “oil sands,” which are currently associated with producing
higher greenhouse gas emissions than fuels derived from conventional, lighter crude oils.
Background and Analysis
When it comes to future oil supplies, Canada’s oil sands will likely make up a larger share of U.S.
oil imports. Oil sands account for about 42% of Canada’s total oil production, and oil sand
production is increasing as conventional oil production declines. Since 2004, when production
from a substantial portion of Canada’s oil sands were deemed economic, Canada has been ranked
second behind Saudi Arabia in proved oil reserves. Canada has over 178 billion barrels of
reserves and a total of over 300 billion barrels of potentially recoverable oil sands (an attractive
investment under high oil price conditions, demonstrated by the billions of dollars already
committed to Canadian development). Canadian crude oil exports (from oil sands and
conventional petroleum sources) were about 2 mbd in 2009, of which 99% went to the United
States. Canadian crude oil accounts for about 21% of U.S. crude oil imports, and about 13% of all
U.S. crude oil and petroleum products supplied. U.S.-based oil companies are major investors in
Canadian oil sands. The infrastructure to produce, upgrade, refine, and transport oil from
Canadian oil sand reserves to the United States is already in place although additional pipeline
capacity is planned. Oil sands production is expected to rise 3.6 mbd by 2030.
Greenhouse gas “emissions intensity” (CO2/barrel) from oil sands are significantly higher than
that from conventional oil production. Canada’s federal government classifies the oil sands
industry as a large industrial air pollution emitter and expects it to produce half of Canada’s
growth in greenhouse gas (GHG) emissions in 2010. Reducing air emissions is one of the most
serious challenges facing the oil sands industry. Between 1995 and 2004, the oil sands industry
reduced its emission intensity by 29% while oil production rose. Overall, CO2 emissions have
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declined from 0.14 tons/barrel (bbl) to about 0.08 tons/bbl since 1990. However, Alberta’s GHG
goals of 238 megatons of CO2 in 2010 and 218 megatons CO2 in 2020 are not expected to be met.
Status of the Issue
New refinery capacity that would accommodate heavier crude from Canadian oil sands is being
challenged in Indiana, Michigan, South Dakota, and elsewhere. Some of these expansions or new
refineries are several years away from operation. A BP refinery upgrade and expansion in
Whiting, Indiana, expected to be completed in 2011, is progressing, but faces lawsuits from
environmental groups. A new $10 billion refinery in Union County, South Dakota, being planned
to process heavy crude from oil sands, would be the first new refinery in the United States in over
25 years. Environmental groups continue to promote standards for low-carbon emission fuel and
oppose the permitting of these refinery projects on the basis that processing heavy crude from
Canadian oil sands would generate much higher greenhouse gas emissions than from
conventional petroleum sources.
Another impediment to expanded use of Canadian heavy oil in refineries in the United States is
the growing opposition to the construction of the Keystone XL pipeline, which is designed to
deliver up to 900,000 barrels per day of Canadian crude oil to new refining capacity that is
expected to be built in the U.S. Gulf Coast region. Opposition to the project in the United States
centers on the inherently high carbon emissions of liquids derived from oil sands, while Canadian
opposition is focused on likely job losses associated with the export of unprocessed crude oil.
Unions in Canada claim that processing the crude oil in Canada, and exporting finished products
like gasoline and diesel fuel to the United States, would create thousands of high-paying jobs for
Canadian workers.
Questions
1. What changes are necessary to significantly reduce the environmental footprint of heavy oil
from Canadian oil sands?
2. How much capital investment in pipeline and refinery infrastructure is needed to support
increased crude oil imports from Canada?
3. What would be the impact on U.S. federal and defense fuel procurements if Section 526
restrictions remain in place on fuel produced from Canadian oil sands?
4. After the drop in oil prices from over $100 per barrel and the continuing effects of economic
recession, how likely is it that Canadian oil sands development will be slowed because of revised
investment strategies by the major oil companies?
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Natural Gas Pipeline from Alaska74
Issue Definition
Congress has been encouraging the development of large natural gas reserves discovered at
Prudhoe Bay, Alaska for over 40 years. Principal among its policies has been promoting the
construction of a natural gas pipeline from the Alaska North Slope to the lower-48 states.
Beginning with the Alaska Natural Gas Transportation Act of 1976, and continuing through the
Alaska Natural Gas Pipeline Act of 2004, the federal government has repeatedly affirmed a
national need for an Alaska natural gas pipeline. The Obama Administration continues that
support. In remarks to the press during his first month in office, President Obama described an
Alaska gas pipeline as “a project of great potential”(as quoted by the Anchorage Daily News,
February 11, 2009).
While it has been on the drawing board for decades, on and off, interest in an Alaska natural gas
pipeline has recently revived because of accelerated growth in U.S. natural gas demand, price
volatility in the natural gas market, and the increased importation of liquefied natural gas (LNG)
from overseas. These factors have led legislators to restart the process of Alaska gas pipeline
development. Important milestones in this activity were Alaska’s August 2008 award to
TransCanada Pipelines Ltd., a Canadian company, of a license to build a natural gas pipeline from
Prudhoe Bay to the lower-48 states and the concurrent announcement of a competing pipeline
proposal along a parallel route. Because large sections of an Alaska natural gas pipeline to the
lower-48 states would pass through Canada, the involvement of Canadian agencies would be
essential for the pipeline’s success. However, Canada has been pursuing its own Arctic natural
gas pipeline projects as well, most notably the proposed Mackenzie Valley pipeline.
Background and Analysis
Arctic Alaska has substantial natural gas resources. The U.S. Geological Survey (USGS)
estimates that conventional natural gas reserves on Alaska’s North Slope potentially exceed 100
trillion cubic feet (Tcf), over four times the total annual gas consumption of the United States.
The agency’s assessment of undiscovered conventional gas resources across the entire Arctic
region concluded that over 1,600 Tcf of additional natural reserves gas remains to be found, with
a significant share located under U.S. territory. The USGS also estimates that the North Slope,
specifically, may contain up to 158 Tcf of technically recoverable natural gas in the form of
methane hydrates. Taken together, these vast natural gas resources—both proven and
anticipated—in Arctic Alaska have been the motivation for a natural gas pipeline to supply
Alaskan natural gas to the lower-48 states.
In 2004, Congress passed the Alaska Natural Gas Pipeline Act (P.L. 108-324, Div. C), a key step
in advancing the pipeline project. Among its main provisions, P.L. 108-324 clarified that the
Federal Energy Regulatory Commission (FERC) could accept, review, and act upon applications
for a new Alaska pipeline project; provided for a pipeline development loan guarantee of as much
as $18 billion; and established guidance for FERC to regulate the pipeline’s capacity bidding
74 Prepared by Paul W. Parfomak, Specialist in Energy and Infrastructure Policy; Resources, Science, and Industry
Division.
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process so that it would be available to parties beyond the three major North Slope producers.
The American Jobs Creation Act of 2004 (P.L. 108-357 § 706) provided a seven-year cost-of-
investment recovery period for tax purposes (instead of the previously allowed 15-year period)
and a designated economic life (class life) of 22 years for the Alaska natural gas pipeline. In June
2006, in accordance with Executive Order 3212, fifteen federal agencies signed a memorandum
of understanding seeking to ensure early coordination and compliance with deadlines and
procedures established by relevant agencies in support of the pipeline’s development.
In 2007, Alaska passed the Alaska Gasline Inducement Act (AGIA), laying out a process to
encourage expedited construction of a natural gas pipeline from Alaska’s North Slope to gas
markets in Alaska and the lower-48 states and providing up to $500 million in matching funds,
thereby reducing the developer’s financial risks. Following passage of the AGIA, developers have
advanced two major competing proposals for an Alaska natural gas pipeline:
• TransCanada Pipelines Ltd. (TransCanada) and Foothills Pipe Lines, Ltd.,
have proposed a pipeline under the AGIA process that would connect with the
existing TransCanada Alberta network at the Alberta hub. The original capacity
of this pipeline would be between 4.5 to 5.0 billion cubic feet per day (Bcf/d).
According to FERC staff, it would be expandable to 5.9 Bcf/d through the use of
greater compression only, and, therefore, at relatively low added cost.
ExxonMobil, one of the three major Prudhoe Bay natural gas producers, joined
with TransCanada in June 2009 to develop this project. The developers
reportedly anticipate project costs between $32 billion and $41 billion (2009
dollars) with an in-service date of 2020.
• BP and Conoco Philips (Denali), two of the three major Prudhoe Bay natural
gas producers, have proposed a 4.0 Bcf/d pipeline project outside the AGIA
process (and, thus, ineligible for the $500 million in state funds). The BP-Conoco
Philips “Denali” Pipeline would follow a route similar to that of the TransCanada
project to the Alberta hub. The developers’ most recent cost estimate for the
project is $35 billion (2009 dollars) with initial service in 2020.
An Alaska natural gas pipeline project has important implications for Alaska’s economy. By one
estimate the net present value of state and local government earnings from such a project could
exceed $29 billion over its lifetime. New natural gas royalty revenue could offset future declines
in ongoing oil royalties from mature North Slope oil fields, which have accounted for 85% of the
state’s unrestricted general fund, on average, since 1977. Development of an Alaska natural gas
pipeline to the lower-48 states would also create many new jobs throughout the nation in support
of, or resulting from, the pipeline’s construction.
Coincident with U.S. promotion of an Alaska pipeline, the Canadian government has been
interested in developing an all-Canadian Arctic natural gas pipeline to U.S. markets. The main
proposal has been a new pipeline from the Mackenzie River Delta to the existing natural gas
pipeline network in Alberta. Initially, developers also proposed transporting Alaska’s North Slope
gas through a spur pipeline connecting to the proposed Mackenzie pipeline, but the Alaskan
connection was rejected by a Canadian government inquiry report in 1974, three years before
President Carter also rejected this option. The current configuration of a stand-alone pipeline to
Alberta is similar in design to the Alaska gas pipeline proposals, albeit smaller in capacity (1.2
Bcfd) and lower in cost ($15 billion) with a projected in-service date of 2016.
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Status of the Issue
The TransCanada and Denali pipelines are proceeding along similar tracks. Both initiated FERC’s
open season process, soliciting commitments for future gas shipments. TransCanada’s open
season closed on July 30, 2010, and the company is now assessing and negotiating the bids
received from potential gas shippers. Denali’s open season is expected to run into October 2010.
If the open seasons yield sufficient interest from gas shippers, either the Denali or TransCanada
project could file pipeline siting applications with FERC, Canada’s National Energy Board, and
other agencies. The TransCanada and Denali pipeline projects are competing and mutually
exclusive proposals, each backed by different North Slope producers. To reduce project costs and
improve the likelihood of success, some key policy makers have been encouraging all the
producers to come together on a single pipeline project. To date, the projects are continuing
independently, but producer cooperation on a single pipeline is a possibility.
Because the Mackenzie Valley pipeline would commercialize a major new source of Canadian
natural gas, and would draw on a limited pool of construction resources and materials available
for such a project, it has been viewed by some as a direct competitor to an Alaska gas pipeline.
Other analysts anticipate that large increases in North American natural gas demand over the next
decade will support development of both pipeline projects, and that sufficient construction
materials will become available when they are needed. They view the Alaska and Mackenzie
Valley pipeline projects as complementary rather than competitive. Canada’s National Energy
Board heard final arguments regarding the Mackenzie pipeline’s siting application in April 2010,
and reportedly plans to render a decision as to whether the project will be allowed to proceed in
September 2010. Notwithstanding recent development progress for all three Arctic natural gas
pipeline proposals, whether any will proceed ultimately depends upon the projects’ economic
viability, especially in light of low natural gas prices stemming from increased shale gas
production throughout North America.
Questions
1. How likely is Canada to make a decision approving the Mackenzie pipeline?
2. Will the Canadian project time the construction to minimize competition between the U.S. and
Canadian projects for inputs such as labor and steel?
3. If developers decide to proceed with an Alaska natural gas pipeline project, how effective will
cooperation be with Canadian authorities for the Canadian section of the pipeline?
4. With recent changes in the long term lower-48 natural gas supply outlook due to new shale gas
development, under what market conditions might Arctic natural gas supplies be competitive?
5. To what extent might the partly competing natural gas pipelines, once completed, diminish the
economic viability of each other?
6. What percentage of the gas delivered by the Mackenzie pipeline is likely to be used by the
Canadian oil sands development, and therefore, not become available to U.S. markets?
7. How might the development of Arctic gas influence future LNG imports to North America (and
vice versa)?
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Great Lakes Restoration75
Issue Definition
The Great Lakes are recognized by many as an international natural resource that has been
significantly altered over the last two centuries. In response, the federal governments of the
United States and Canada, and the state and provincial governments in the Great Lakes basin
have implemented several restoration activities. After several years of restoration activities, some
contend that efforts are not progressing and are loosely organized. Some specific concerns
include the slow rate of cleaning up toxic sediments in this ecosystem, and lack of governance
and a comprehensive plan to address restoration of the Great Lakes.
Background and Analysis
The Great Lakes watershed is the largest system of fresh surface water in the world. The
watershed covers approximately 300,000 square miles and is shared by eight U.S. states (Illinois,
Indiana, Michigan, Minnesota, New York, Ohio, Pennsylvania, and Wisconsin) and one Canadian
province (Ontario). The Great Lakes contain nearly 90% of the surface freshwater of the United
States and 20% of the surface freshwater of the world. An estimated 40 million people rely on the
Great Lakes basin to provide jobs, drinking water, and recreation, among other things. In the last
several decades, agricultural activity throughout the basin, and urban and industrial development
concentrated along the shoreline, have degraded water quality in the Great Lakes, posing
potential threats to the ecosystem. Development has also led to changes in terrestrial and aquatic
habitats, the introduction of non-native species, the contamination of sediments, and the listing of
more than 50 threatened or endangered species in the basin.
The Great Lakes Restoration Initiative
The Great Lakes Restoration Initiative (GLRI) aims to restore and maintain the chemical,
physical and biological integrity of the Great Lakes Basin Ecosystem. The GLRI began in 2010
and received $475 million for FY2010 budget. The planning, structure, projects, and programs of
the Initiative are based on the work of the Great Lakes Interagency Task Force (Task Force) and
other agreements that address restoration. The Initiative will be directing funding to the following
focus areas:
• Toxic substances and Areas of Concern;
• Invasive species;
• Nearshore health and nonpoint source pollution;
• Habitat and wildlife protection and restoration; and
• Accountability, monitoring, evaluation, communication, and partnerships.
The EPA will be the lead agency for the GLRI. The EPA has authority to transfer funds from
FY2010 appropriations to federal agencies for subsequent use and distribution for Great Lakes
75 Prepared by Pervaze Sheikh, Analyst Natural Resources Policy, Resources, Science, and Industry Division.
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restoration activities and projects. Some of the funds are to be competitively awarded as grants to
governmental entities, nonprofit organizations, institutions, and individuals for planning,
research, monitoring, outreach, and implementation of the Great Lakes Restoration Initiative and
Great Lakes Water Quality Agreement. Although current EPA restoration programs and activities
for the Great Lakes are included in the $475 million, other ongoing restoration activities
conducted by federal agencies are not expected to be diminished. For FY2011, the Administration
has requested $300 million for this initiative.
Under the GLRI, an Action Plan was developed. The Action Plan provides a framework for
restoring the Great Lakes ecosystem from 2010 to 2014. The Task Force is responsible for
ensuring the development and the implementation of the Action Plan. The GLRI is organized into
five focus areas listed above. For each focus area, the Action Plan provides a problem statement,
a set of goals, interim objectives, progress measures, final targets, and principal activities for
restoring the ecosystem. The principal actions in the Plan are not specific projects; rather, they are
broad actions that address the objectives of the focus areas. Each year, federal agencies are
expected to identify specific projects they will take to implement the Action Plan.
The Great Lakes Strategy
In 2004 a federal Great Lakes Interagency Task Force was created to provide strategic direction
for Great Lakes policies on restoration and to form a regional collaboration of stakeholders
interested in restoring the Great Lakes ecosystem. The Great Lakes Regional Collaboration,
which consists of over 1,500 stakeholders, released the Great Lakes Regional Collaboration
Strategy, a plan based on implementing a series of recommendations for actions and activities to
start the restoration of the Great Lakes ecosystem over the next five years. The Strategy
encompasses eight issue areas: aquatic invasive species, fish and wildlife habitat (habitat/species),
coastal health, contaminated sediments, nonpoint source pollution, toxic pollutants, indicators and
information, and sustainable development. The total cost of implementing the Strategy is
estimated to be $20 billion over five years. The implementation of the Strategy relies on existing
authorities, programs, and funding at federal, state, and local levels of government, as well as
some new actions that may require enacting new federal legislation. The Strategy as a whole is
not being implemented and is being incorporated into the GLRI.
Restoring Areas of Concern the Great Lakes
The Great Lakes Legacy Act of 2002 was enacted to address sediment contamination in Areas of
Concern (AOCs) within the Great Lakes ecosystem (the act was amended in 2008 to extend the
authorization for appropriations through 2010). AOCs are geographical areas within the Great
Lakes that represent the most degraded portions of the ecosystem. AOCs contain contaminated
sediment, wastewater, and other non-point source pollution. In 1987, the United States and
Canada identified 43 AOCs in the Great Lakes basin. Twenty-six AOCs are in U.S. waters, 12 in
Canadian waters, and 5 shared by both countries. The act authorizes $50 million annually in
appropriations for FY2004-FY2010 for contaminated sediment remediation projects in AOCs in
the United States. From FY2004-FY2009, there has been approximately $163 million
appropriated to all programs authorized under the Legacy Act, approximately half the authorized
amount. However, for FY2010, the EPA “expects to provide up to approximately $75 million” to
clean up or assess contaminated sediments in the Great Lakes. The act also authorizes funding for
research and development of remediation technologies, and public outreach and education about
remediation. The Environmental Protection Agency (EPA) administers the selection and funding
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of projects authorized under the Legacy Act. Six projects are currently being evaluated, one
project is underway, and four projects have been completed under the Legacy Act. One AOC has
been delisted in the United States and two have been delisted in Canada.
Water Withdrawals From the Great Lakes
Several laws, policies, and governing bodies regulate the use, withdrawal, and diversion of water
from the Great Lakes basin; however, the concern over domestic and international demand for
Great Lakes water has prompted officials from the United States and Canada to reevaluate these
laws and policies. The Council of Great Lakes Governors (CGLG)—a partnership of the
governors of the eight Great Lakes states and the Canadian provincial premiers of Ontario and
Québec—was tasked with creating a new common conservation standard to manage water
diversions, withdrawals, and consumptive use proposals. In 2005, the CGLG released (1) the
Great Lakes-St. Lawrence River Basin Sustainable Water Resources Agreement (Agreement) and
(2) the Great Lakes-St. Lawrence River Basin Water Resources Compact (Compact). These water
management proposals ban new and increased diversions of water outside the Great Lakes Basin
with only limited, highly regulated exceptions, and establish a framework for each state and
province to enact laws protecting the Basin. The Compact was approved by each state legislature
and the U.S. Congress. It is now taken effect as an interstate compact. The Canadian federal
government and the provinces of Ontario or Québec are not parties to the Compact; however, the
provinces are signatories to the related international state-provincial Agreement.
Status of the Issue
After introducing the GRLI in 2010, several have questioned whether GRLI will maintain its
level of funding for the duration of the initiative. To implement the Action Plan (from 2010 to
2014), it is estimated that GLRI will need approximately $300 million for FY2011, and $1.4
billion from FY2012 to FY2014. The FY2011 budget request from the Administration provides
$300 million for the Great Lakes Restoration Initiative. Congress is expected to deliberate the
specifics of this request and the GLRI during the appropriations process.
To support GLRI, some have suggested creating legislation that authorizes the implementation of
GLRI and its funding. Further, some others contend that restoration activities in the Great Lakes
should be governed by a central entity. They argue that questions such as who is in charge, what
are the federal and state roles in restoration, and how will the implementation of restoration
activities be governed remain unanswered. The GLRI does not define a governing structure or
decision-making process, but has EPA as the lead federal agency for implementing the initiative.
Pending legislation would address these issues. S. 3073 and H.R. 4755 would authorize GLRI
and implement a governance structure for managing restoration activities. In addition, both bills
would reauthorize funding for cleaning up AOCs and authorize $475 million annually from
FY2011 to FY2016 to implement GLRI.
Questions
1. Given that the boundaries of the Great Lakes ecosystem extend across the United States and
Canada, what major efforts are being done in Canada to restore the Great Lakes? Is Canada
considering a comprehensive restoration plan that may involve binational participation?
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2. Does Canada have plans for a comprehensive Great Lakes restoration strategy or plan? How
can Canada collaborate with the EPA in undertaking restoration activities in the GLRI?
3. What efforts are being done to clean-up AOCs in Canada, and have they been successful? Is
there scientific, technical, or programmatic collaboration between the U.S. and Canada in
cleaning up AOCs shared by both countries?
4. The Compact and resulting water withdrawals could potentially affect the environment and the
economies of, and relationship between, Canada and the United States. How is Canada
implementing the Great Lakes Water Agreement? Are there any foreseen implementation
challenges that might require binational cooperation?
5. Water quality is a concern for many in the U.S. and Canada, and is currently addressed by the
Great Lakes Water Quality Agreement. The Agreement is being considered for revision by the
governments of Canada and the United States. What is the status of the review of the Agreement?
Is Canada considering revisions to the Agreement?
Author Contact Information
Carl Ek, Coordinator
James K. Jackson
Specialist in International Relations
Specialist in International Trade and Finance
cek@crs.loc.gov, 7-7286
jjackson@crs.loc.gov, 7-7751
Ian F. Fergusson, Coordinator
Jeanne J. Grimmett
Specialist in International Trade and Finance
Legislative Attorney
ifergusson@crs.loc.gov, 7-4997
jgrimmett@crs.loc.gov, 7-5046
Shayerah Ilias
Richard J. Campbell
Analyst in International Trade and Finance
Specialist in Energy Policy
silias@crs.loc.gov, 7-9253
rcampbell@crs.loc.gov, 7-7905
Pervaze A. Sheikh
Remy Jurenas
Specialist in Natural Resources Policy
Specialist in Agricultural Policy
psheikh@crs.loc.gov, 7-6070
rjurenas@crs.loc.gov, 7-7281
Ross W. Gorte
Bill Canis
Specialist in Natural Resources Policy
Specialist in Industrial Organization and Business
rgorte@crs.loc.gov, 7-7266
bcanis@crs.loc.gov, 7-1568
Chad C. Haddal
Rachel Tang
Specialist in Immigration Policy
Analyst in Industrial Organization and Business
chaddal@crs.loc.gov, 7-3701
rtang@crs.loc.gov, 7-7875
Rebecca M. Nelson
Robert Pirog
Analyst in International Trade and Finance
Specialist in Energy Economics
rnelson@crs.loc.gov, 7-6819
rpirog@crs.loc.gov, 7-6847
M. Angeles Villarreal
Paul W. Parfomak
Specialist in International Trade and Finance
Specialist in Energy and Infrastructure Policy
avillarreal@crs.loc.gov, 7-0321
pparfomak@crs.loc.gov, 7-0030
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Acknowledgments
Former CRS analyst Stan Mark Kaplan contributed to this report.
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