United States-Canada Trade and Economic Relationship: Prospects and Challenges

Prepared for Members and Committees of Congress

The United States and Canada conduct the world’s largest bilateral trade relationship, with total
merchandise trade (exports and imports) exceeding $561.5 billion in 2007. The U.S.-Canadian
relationship revolves around the themes of integration and asymmetry: integration from
successive trade liberalization from the U.S.-Canada Auto Pact of 1965 leading to North
American Free Trade Agreement (NAFTA), and asymmetry resulting from Canadian dependence
on the U.S. market and from the disparate size of the two economies.
The economies of the United States and Canada are highly integrated, a process that has been
accelerated by the bilateral U.S.-Canada free trade agreement (FTA) of 1988 and the NAFTA of
1994. Both are affluent industrialized economies, with similar standards of living and industrial
structure. However, the two economies diverge in size, per capita income, productivity and net
Canada is the largest single-country trading partner of the United States. In 2007, total
merchandise trade with Canada consisted of $313.1 billion in imports and $248.4 billion in
exports. However, China displaced Canada as the largest source for U.S. imports for the first time
in 2007. While Canada is an important trading partner for the United States, the United States is
the dominant trade partner for Canada, and trade is a dominant feature of the Canadian economy.
Automobiles and auto parts, a sector which has become highly integrated due to free trade, make
up the largest sector of traded products. Canada is also the largest exporter of energy to the United
States. Like the United States, the Canadian economy is affected by the transformation of China
into an economic superpower. The United States and Canada also have significant stakes in each
other’s economy through foreign direct investment.
Both countries are members of the World Trade Organization (WTO) and both are partners with
Mexico in the NAFTA. While most trade is conducted smoothly, several disputes remain
contentious. Disputes concerning the 2006 softwood lumber agreement are under arbitration and
agriculture subsidies are being addressed by dispute settlement body at the WTO. In addition,
U.S. regulatory proceedings restricted the importation of Canadian beef (now lifted), and the
United States has placed Canada on its Special 301 watch list over intellectual property rights
The terrorist attacks of 2001 focused attention on the U.S.-Canadian border. Several bilateral
initiatives have been undertaken to minimize disruption to commerce from added border security.
The focus on the border has renewed interest in some quarters in greater economic integration,
either through incremental measures such as greater regulatory cooperation or potentially larger
goals such as a customs or monetary union. Congressional interest has focused on these disputes,
and also on the ability of the two nations to continue their traditional volume of trade with
heightened security on the border. This report will be updated periodically.

The Economies of the United States and Canada............................................................................1
The Trade and Investment Relationship..........................................................................................3
Autos ................................................................................................................................... 5
Energy ................................................................................................................................. 6
China .......................................................................................................................... ......... 6
Trade Deficit.......................................................................................................................7
Services ............................................................................................................................... 8
In ve stme nt ................................................................................................................................. 9
Disput es ....................................................................................................................... .................. 12
Security and Trade.........................................................................................................................17
Prospects and Policy Options........................................................................................................20
Figure 1. Merchandise U.S. Trade Deficit with Canada..................................................................9
Figure 2. FDI Flows 2001-2006....................................................................................................10
Figure 3. FDI Stock 2001-2006......................................................................................................11
Figure 4. Net Inward FDI Flows from All Countries: 2001-2006.................................................12
Table 1. Selected Comparative Statistics, 2007...............................................................................2
Table 2. U.S. Merchandise Trade With Canada, 2007.....................................................................7
Author Contact Information..........................................................................................................23

The economies of the United States and Canada are highly integrated, a process that has been
accelerated by the bilateral U.S.-Canada free trade agreement (FTA) of 1989 and the North
American Free Trade Agreement (NAFTA) of 1994. The two countries are natural trading
partners, given their geographic proximity and their (partial) linguistic and cultural similarities.
Because 80% of the Canadian population lives within 200 miles of the U.S. border and due to the
impediments of Canadian geography, trade with the United States is often easier and less
expensive than Canadian inter-provincial trade. Both are affluent industrialized economies, with
similar (though not identical) standards of living.
However, the economies of the two countries diverge in numerous ways. First, the U.S. economy
dwarfs that of Canada. U.S. gross domestic product (GDP) is nearly 10 times that of Canada in 1
nominal terms and nearly 11 times as large in terms of purchasing power parity. (See Table 1.)
This large and historic disparity has presented opportunities and challenges for Canada. NAFTA
provides Canada with a large market for its exports at its doorstep, however it has also led to
increased import competition for small-scale Canadian businesses. The Canadian economy is also
disproportionately impacted by a U.S. economic slowdown or changes in the bilateral exchange
Since 2001, the average real GDP growth rates of the United States and Canada have been
virtually identical Canada (2.6 for Canada versus 2.4 for the U.S.) Per capita average annual
growth rates have shown a similar, though smaller trend (1.6% v. 1.4%). Canadian per capita
GDP, in terms of PPP has remained relatively constant at around 83% of U.S. per capita income.
The persistent per capita income gap has proven worrisome to Canadian policymakers as it raises
questions about Canadian productivity and competitiveness (see box).
In terms of sectoral components of GDP, the United States and Canada are similar. Over two-
thirds of both economies are devoted to the services sector, although the sector is relatively larger
as a percentage of GDP in the United States (80% -68%). The manufacturing sector’s
composition of GDP has fallen in both countries over time, but it is still relatively more important
to the Canadian economy (30%-20%). Agriculture makes up the remaining 2.5% of the Canadian
economy and 1% of the U.S. economy.
In terms of savings and investment, Canada and the United States have diverged. Canada’s
experience with fiscal profligacy in the 1970s and 1980s caused the country to eschew deficit
spending in the 1990s. Parliament consistently has passed balanced budgets since 1997, although
government spending swung slightly into deficit in 2002-3, and Canada has lowered its ratio of
public debt-to-GDP from 100% of GDP in 1996 to 64.2% of GDP in 2007. The United States has
a lower ratio of debt-to-GDP, but it has stabilized at around 37% of GDP after trending upwards
earlier in the decade.

1 Purchasing power parity (PPP) is a economic theory which holds that exchange rates between currencies are in
equilibrium when their purchasing power is the same in each of the two countries. PPP is useful for cross-country
comparisons because its measurement excludes exchange rate volatility and speculation.

Table 1. Selected Comparative Statistics, 2007
Indicator United States Canada
Nominal PPP (billion US$) 13,841 1,266
Nominal (billion $) 13,841 1,417
Per Capita GDP
Nominal PPP ($) 45,820 38,460
Nominal ($) 45,820 43,040
Real GDP Growth 2.2% 2.7%
Recorded Unemployment Rate 4.6% 5.8%
Exports (%GDP) 8.4% 29.4%
Imports (%GDP) 14.1% 26.9%
Sectoral Components of GDP (%)
Industry 19.5% 29.8%
Services 79.5% 67.8%
Agriculture 1.0% 2.5%
Current Account Balance (% GDP) -5.3% 0.8%
Public Debt/GDP 36.9% 64.2%
Sources: Economist Intelligence Unit; Census Bureau; Bureau of Economic Analysis; Statistics Canada.
Some of the differences between U.S. and Canadian economic performance may be traced to the
differences in the role and structure of the government in economic life. While both countries can
be identified as generally free-market capitalist economies, at times Canada has adopted more
interventionist economic policies. Prior to the FTA with the United States, Canada protected her
small-scale manufacturing enterprises that produced solely for the domestic market with high
tariffs. While these plants provided jobs to Canadian workers, they resulted in higher prices for
Canadian consumers and led to a relatively inefficient allocation of national economic resources.
Canada has also provided its citizens with a more generous social safety net including a
government-run national health service. Canadian citizens pay higher taxes to receive these
benefits, but private industry is relieved of providing health care coverage.
A different relationship between the Canadian federal government and the provinces also affect
economic dynamics. Canadian provinces have relatively more power vis-a-vis Canada’s federal
government than that of states with the U.S. government. For example, natural resources are
under the policy control (and in many cases, ownership) of Canadian provincial governments. In
the softwood lumber dispute, provincial ownership and management of forests have made the
provincial governments key players in the negotiations. Alberta’s vast energy reserves may also
cause friction between it and other “have-not” provinces without similar resource endowments.
The Canadian federal government attempts to provide a uniform level of services across the
provinces by providing “equalization” payments to poorer provinces, however, these payments
are a source of continuous squabbling between the provinces, on one side, and the federal

Canada is the largest single nation trading partner of the United States. In 2007, total merchandise
trade with Canada was $561.5 billion (a 5.2% increase over 2006), consisting of $313.1 billion 2
(3.2% over 2006) in imports and $248.4 billion (7.9% over 2006) in exports. In 2007, more than
$1.5 billion in goods crossed the border each day. Trade with Canada represented 18.0% of U.S.
total trade in 2007, with Canada purchasing 21.3% of U.S. exports and supplying 16.0% of total
U.S. imports last year. While Canada is an important trading partner for the United States, the
United States is the dominant trade partner for Canada. The United States supplied 64.9% of
Canada’s imports of goods in 2007 and purchased 76.3% of Canada’s merchandise exports.
While the absolute value of trade continues to increase between the two nations, each nation’s
share of trade with the other has decreased in recent years. As a share of U.S. total trade, trade
with Canada dropped from 20%-18% between 2003-2008. Conversely, trade with the United
States dropped from 78% to 71% of Canada’s global trade in the same period.

2 Trade figures are expressed in terms of general imports (customs value), and total exports (FAS value) as compiled by
the U.S. International Trade Commission. Canadian figures are from Statistics Canada.

Trade is a dominant feature of the The Productivity Conundrum
Canadian economy. While in the United Economists have long noticed that measures of productivity are
States, the value of trade (exports + generally lower in Canada than in the United States, and that
imports) as a percentage of GDP was this disparity has persisted despite the increasing level of integration between the two nations’ economies. Productivity
about 22.5% in 2007, the comparable typically is measured as output per input (single-factor
figure for Canada was 56.2%. Canada’s productivity) or as a bundle of inputs (total-factor productivity).
goods exports totaled $416 billion in Productivity typically measures output per unit of labor or per

2007, which represented 29.4% of unit of capital. Total factor productivity measures the residual

Canadian GDP and exports to the after accounting for capital and labor, which accounts for technological change or innovation. These measures are
United States alone represent 22.1% of important because over time, productivity improvement is an
Canadian GDP. A further 17.5% of important determinant of a nation’s living standard or its level of
Canadian GDP was used to purchase real income and growth
U.S. goods. In 2007, Canada imported According to two studies, Canada’s lower productivity accounts
$381 billion from all destinations, for the largest component of the income gap between the

26.9% of its GDP. Canada is relatively United States and Canada. They note that Canada has invested

more exposed to the world economy and less in machinery and equipment per worker since the 1980s, resulting in less capital intensity (less capital per worker).
to the fortunes of other economies, Canada’s research and development (R&D) as a proportion of
foremost the United States, than most GDP is lower than that of the United States and other OECD
other countries. countries. Usage of information and communications technology
(ICT) is also less extensive than the United States, although the
Autos and auto parts are the top U.S. OECD reports that Canada ranks third in OECD countries after the United States and Sweden in ICT application. While Canada
exports to, and second largest imports ranks favorably to the United States in primary and secondary
from, Canada. Computer equipment, educational attainment, Canadians fall behind their American
electrical equipment, engines, counterparts in the attainment of university or advanced
turboengines, recorded media, optical degrees and in opportunities for on-the-job training or
equipment and precision instruments are continuous education. Finally, industrial organization also plays a part. According to the Conference Board of Canada, Canadian
other major U.S. exports. Primary U.S. manufacturers are more heavily concentrated in lower
imports from Canada outside the productivity growth industries. Smaller enterprises (SME) are
automotive sector are energy (natural generally less productive than larger ones, and SMEs are a
gas, petroleum products, electricity), greater share of Canadian manufacturing and employment.
engines, aircraft equipment, wood, and Canadian plants of foreign firms are generally more productive than indigenous companies, perhaps because they import best-
paper products. practices and technical know-how from their home operations.
This may account for the productivity prowess of Canadian auto
That the United States and Canada trade operations.
substantial volumes of the same goods Organization of Economic Cooperation and Development,
bespeaks the economic integration of OECD Economic Surveys: Canada, 2004; Conference Board of
the two economies. This integration has Canada, Performance and Potential 2003-4: Defining the
been assisted by trade liberalization over Canadian Advantage.

the past 40 years, beginning with the
Automotive Agreement of 1965 (which eliminated tariffs on shipments of autos and auto parts
between the two countries), through the Canada-U.S. Free Trade Agreement of 1989 (FTA), and
NAFTA. Under the FTA (which was incorporated into NAFTA), bilateral tariffs except for certain
agricultural products were phased out over a 10-year period culminating in 1998.
The elimination of tariffs and the reduction of nontariff barriers have contributed to the process of
specialization, as each country is able to produce goods for a larger continent-wide market. Thus,
firms are able to improve productivity through increased economies of scale and coordinated
production. Such specialization led to increased bilateral trade, much of it in intermediate

products. One study estimated that about 45% of U.S.-Canadian trade was intra-firm trade,
reflecting the substantial integration of the two economies and contributing to increased 3
efficiency and competitiveness of firms on both sides of the border.
Integration of the U.S. and Canadian automotive industries is an example of the benefits of
specialization and economies of scale. Before the mid-1960s, each country’s industry produced
for its own market, due largely to tariffs imposed by both countries. Canadian auto firms (mostly
subsidiaries of U.S. firms) were considerably less productive than their U.S. counterparts because
Canadian firms produced a variety of differentiated products for a relatively small domestic
market in an industry characterized by economies of scale.
The Automotive Agreement of 1965 (Auto Pact) between the United States and Canada began the
process of integration by eliminating tariffs on shipments of autos and auto parts between the two
countries. Thus, each country’s industry could specialize in a smaller number of products and use
longer production runs. Coordinated production on both sides of the border increased
significantly, as did bilateral automotive trade. Coordinated automotive production has raised
living standards in both the United States and Canada, and has strengthened the global
competitiveness of producers on both sides of the border.
Motor vehicles, vehicle parts, and engines made up 21.4% of U.S. exports to Canada and 20.3%
of U.S. imports from Canada in 2007 (see Table 2). Although vehicles and parts flow in both
directions, the primary trajectory is that of U.S. parts exported to Canada for assembly, and
vehicles exported back to the United States. In 2007, 2.30 million vehicles were imported from
Canada. U.S. auto exports to Canada neared 1.1 million vehicles the same year, an increase of

17.3% from 2003. One notable feature of this trade is the increasing composition of trade in so-

called ‘new domestic’ manufactures, foreign-owned companies with manufacturing and assembly
plants in the United States and Canada. While the value of Canadian “Big 3” exports to the U.S.
has declined 32% since 2000, the value of the primarily Japanese new domestics has increased by
45%, and in 2006 these new domestics made up 31.5% of Canadian imports into the United
States. The value of Canada’s imports of U.S.-produced new domestics has also increased by
about 1/3 from 2000, and made up about 21% of the value of U.S. vehicle exports to Canada in 4


While Canada suffers from productivity problems in other sectors of its economy, its automotive
plants are among the most competitive in North America. Part of the cost advantage traditionally
had been due to the weak Canadian dollar (also known as the “loonie” due to representation of a
loon on the C$1 coin), but that advantage has diminished with the loonie’s nearly 50%
appreciation since 2002. Another major competitive advantage is Canada’s national health
system, which reportedly relieves Canadian automakers of approximately $1,400 in costs per 5

3 World Trade Organization, Trade Policy Review: Canada, Report by the Secretariat, October 6, 1996,
(WT/TPR/S/22), p. 6.
4 “Canada’s Changing Auto Industry,” by Francine Roy and Clerance Kimanyi, Canadian Economic Observer, May
2007, figures extrapolated from Table 2, p. 3.7.
5 “Ontario to Overtake Michigan As Auto Kingpin,The New York Times, November 29, 2004.

Canada is the largest supplier of energy (including petroleum, natural gas, and electricity) to the
United States. While the dollar value of U.S. imports of Canadian crude oil and natural gas
increased nearly 85% since 2003, the volume in terms of barrels and cubic feet has remained
roughly constant, and oil imports actually fell 2.4% in quantity last year from 2006. In 2005, oil
and gas displaced motor vehicles as the United States’s largest import from Canada. Canada has
traditional sources of crude oil in Alberta and off the coasts of Newfoundland and Nova Scotia.
As the price of crude oil increases, petroleum extracted from Albertan oil sands are becoming a
major part of Canadian energy supplies. Oil sands are surface mined, and the oil is extracted
through pressurization. The process itself is energy intensive, water dependent, and not all that
environmentally friendly. However, it is estimated that the potential oil extracted from the oil 6
sands represent reserves second only those held by Saudi Arabia. Provisions of the FTA and
NAFTA assure free trade in energy between the U.S. and Canada, by prohibiting the imposition
of minimal export prices or export taxes, and by restricting the imposition of supply restrictions.
China’s emergence as an economic superpower and the United States response has become a
major issue in the United States. In Canada, political discussion has been more muted, but some
of the same issues are present. China is now Canada’s second largest trading partner, and is
growing rapidly. However, most of this increase is import-based. In 2007, Canada imported $35.9
billion in goods from China, primarily a typical array of labor intensive products: apparel,
footware, consumer electronics, toys, and telecommunications equipment. Meanwhile, Canada’s
exports to China totaled $8.7 billion of primarily natural resources: forest products, metals,
petroleum, and agriculture, but also aviation equipment and telecommunications equipment.
Canadians and Americans have similar concerns over the loss of manufacturing jobs in import-
competing industries to low-wage producers such as China. Perhaps more important, from the
Canadian perspective, is the concern that Canadian producers will be pushed out of the U.S.
market by low-wage competition. One study found that while such a threat is real, China now 7
competes more with Mexico in labor intensive sectors than does Canada in the U.S. market.
China’s near unquenchable thirst for natural resources to fuel its economic boom has led it to
attempt to purchase natural resource assets abroad, including a controversial bid for Unocal in the
United States. Two Chinese oil companies, including CNOOC, have purchased stakes in Alberta’s
oil sands projects, and a pipeline is to be constructed in conjunction with PetroChina from Alberta
to the West Coast. An attempted Chinese purchase of Noranda (now Falconbridge), one of the
world’s largest zinc, nickel, and copper concerns, by China Minmetals was called off in 2004 due
to rising share prices. However, the proposed deal did spark concern about purchase of Canadian
resources by a subsidiary of the Chinese Metals Ministry and about the company’s human rights 8
and Communist party ties.

6 For more information on the oil sands, see CRS Report RL34258, North American Oil Sands: History of
Development, Prospects for the Future, by Marc Humphries.
7 Wendy Dobson, “Taking A Giant’s Measure: Canada, NAFTA, and an Emergent China, C.D. Howe Institute,
September 2004.
8Canada Welcomes Chinas Cash - Hospitality Toward Investments Run Counter to Mood in U.S.,” Wall Street
Journal, July 15, 2005.

Table 2. U.S. Merchandise Trade With Canada, 2007
Amount Amount
Export Category billion$ (%chg from Import Category billion$ (%chg from
06) 06)
Motor Vehicle Parts 27.9 (5.2) Oil and Gas 62.9 (5.7)
Motor Vehicles 25.3 (12.1) Motor Vehicles 46.4 (-1.3)
Special Classification 9.6 (29.6) Motor Vehicle Parts 17.2 (1.5)
Agriculture/ Construction 8.3 (6.8) Petroleum and Coal Products 12.3 (17.2)
Computer Equipment 8.1 (-3.6) Nonferrous Metal and Processing 10.8 (23.0)
General Purpose Machinery 7.5 (3.8) Pulp, Paper, Paperboard 10.0 (-3.5)
Chemicals 6.7 (6.3) Returned/Reimported 9.2 (-2.0)
Iron/Steel/Ferroalloy 6.6 (8.5) Special Classification 8.8 (4.3)
Materials/ Resins/synthetic fibers 6.1 (-0.9) Aerospace Products and Parts 8.3 (25.2)
Aerospace Products/Parts 5.9 (28.6) Aluminum 7.7 (-1.9)
Navigation/Electrical/ Medical/Control 5.7 (9.2) Basic Chemicals 6.9 (9.4)
Miscellaneous Manufactured Products 4.9 (17.7) Resin, Synthetic Rubber, artificial 5.7 (-3.1)
Fabricated Metal 4.9 (7.1) Sawmill and Wood Products 5.5 (-19.2)
Semiconductors 4.8 (-17.2) Iron/Steel/Ferroalloy 5.3 (12.1)
Engines/Turbines/ Power Transmission 4.8 (-13.2) Pharmaceutical/ Medicines 4.9 (37.0)
Plastics Products 4.8 (5.6) Plastic Products 4.8 (-5.8)
Petroleum / Coal Products 4.4 (28.7) Other General Purpose Machinery 4.7 (13.7)
Oil and Gas 4.2 (30.4) Agriculture and Construction 4.0 (-2.5)
Converted Paper Products 3.9 (6.3) Communications Equipment 3.4 (29.2)
Pharmaceutical/ Medicines 3.7 (-0.8) Pesticides, Fertilizer, Agriculture 3.0 (19.9)
All Other 90.5 (8.4) All Other 71.3 (-1.3)
Total $248.4 (7.9) Total $313.1 (3.2)
Source: U.S. International Trade Commission. (Figures are NAIC-4, Total Exports and General Imports.)
Note: May not total due to rounding.
The U.S. merchandise trade deficit with Canada decreased 11.6% from $73.2 billion in 2006 to
$64.7 billion in 2007. While imports generally grew faster than exports in the free trade era,
increasing from 3.5% of the value of total trade in 1991 to 15.3% in 2005, this trend reversed in
2006 and in 2007 the ratio fell to 11.5%. The persistent trade deficit with Canada has been
blamed on many factors. Up until 2003, the deficit was attributed, in part, to the weakness of the

Canadian dollar. The loonie had steadily depreciated in value in the decade prior to 2003. Worth
approximately $0.84 at the time of the U.S.-Canada Free Trade Agreement in 1989, the currency
briefly sank to $0.63 in 2002. Thenceforth, the loonie steadily appreciated to an average of $0.71
in 2003, $0.75 in 2004,$0.83 in 2005, $0.88 in 2006, and $ 0.93 in 2007. The loonie reached
parity for the first time in 31 years on September 20, 2007, before peaking at an intra-day high of
$1.10 on November 7. Since that date, the loonie has crossed the parity line 3 times in its relation
to the U.S. dollar. Increased prices for natural resources and energy, attributed to the global
expansion and Chinese development has contributed to the loonie’s strength, as has the general
weakness of the U.S. dollar.
In 2006, the depreciating U.S. dollar—which makes cheaper U.S. goods more attractive on the
Canadian market—began to have an ameliorative effect on the U.S.-Canadian trade deficit and
this trend continued in 2007. For Canada, the loonie’s appreciation has taken a toll on its
manufacturing industry centered in Ontario and Quebec. However, Canadian consumers have
responded to their now strengthened currency with what has been called a “social epidemic” of
cross-border price comparisons. This rush of Canadian shoppers across the border, which reached
multi-year highs in September 2007, has reportedly caused traffic jams and parking problems at 9
border-area malls and shopping districts in northern-border states.
The United States also conducts a substantial services trade with Canada. In 2006, the United
States exported $39.3 billion worth of private services to Canada and imported $23.5 billion, for a
surplus of $15.8 billion. Canada is the third largest destination for U.S. service exports after the
United Kingdom and Japan, accounting for 9.7% of U.S. service exports. Imports from Canada
represent about 7.6% of total U.S. service imports, and rank third in magnitude after, again, the
United Kingdom and Japan. In 2006, U.S. service exports represented 57% of Canadian service
imports, and Canadian service exports to the United States represented 55% of total Canadian 10
service exports. Commercial services made up about 53% of Canadian service trade in 2006 and
travel and tourism totaled another 25.2%. U.S. travelers accounted for 53% of worldwide travel
expenditures to Canada in 2006; Canadian tourists spent 56% of their tourist dollars in the United 11
States that year.

9 “Price-savvy ‘Social Epidemic’ Sweeps U.S. Border, Globe and Mail, November 21, 2007.
10 U.S. Bureau of Economic Analysis, Survey of Current Business, October 2007; Statistics Canada, Balance of
International Payments - Fourth Quarter 2006, Table 18. Available at http://www.statcan.ca/english/freepub/67-001-
11 Statistics Canada, Balance of International Payments, Table 17, Table 60.

Figure 1. Merchandise U.S. Trade Deficit with Canada
13 14 13.5 13.9 15.4 15.3 13.7 11.520
5.6 6.3 9.5
-17.9 -20.7-2 0
-34.4-4 0
-52.8 -53.2 -49.8 -54.7-6 0
-68.2 -73.1 -64.7
-76.5-8 0
1997 2000 2003 2006
Trade Balance ($)
trade deficit/% total trade
The U.S.-Canada economic relationship is characterized by substantial investment in each nation
by investors of the other. The United States is the largest single investor in Canada with a stock of
$246.5 billion in 2006, a figure that has more than doubled from $97 billion in 1997. This figure
represents 10.3% of U.S. direct investment abroad (DIA), and U.S. investors accounted for 61% 12
of inbound foreign direct investment (FDI) in Canada in 2006. Manufacturing, finance/
insurance, and mining/energy are the three largest categories of U.S. FDI in Canada. Canada has a
prominent (though not the largest) FDI position in the United States at $159.0 billion, 8.9% of the
total FDI stock in the United States. The United States is the most prominent destination for
Canadian DIA, with a stock of 42.7% of total Canadian DIA in 2006.

12 BEA, Survey of Current Business, July 2007; Statistics Canada, The Daily, May 9, 2007. See http://www.statcan.ca/

Figure 2. FDI Flows 2001-2006
Source: U.S. Bureau of Economic Analysis (BEA)
Canada is also highly dependent on FDI. In 2006 FDI represented 31.4% of Canada’s GDP, and 13
Canadian DIA represented 36.1% of GDP, both figures up from about 20.0% in 1995. Flows of
FDI, which have picked up during the early years of the present economic expansion, have
slowed again since 2005.

13 Ibid.

Figure 3. FDI Stock 2001-2006
Source: BEA
Canadian FDI Policy . Foreign investment has played a large part in the development of the
Canadian economy. British and American capital was instrumental in building Canada’s railways thth
in the 19 century and in exploiting its resources in the 20. Although Canada is generally open
to foreign investment, certain restrictions do exist on some forms of FDI. Investment is monitored
and some types of FDI are reviewed. “Significant investments in Canada by non-Canadians” are
reviewed under the Investment Canada Act to insure “net benefit” to Canada. The review
threshold for parties to the World Trade Organization (WTO), including the United States, is $223
million. All transactions involving uranium production, financial services, transportation services, 14
or cultural business must be reviewed. Net benefit is assessed on such factors as effect on level
of economic activity in Canada including employment; the degree or significance of participation
by Canadians; the effect of productivity and technological development; the effect on
competition; the effect on Canadian competitiveness on world markets; and compatibility with
national, industrial, or cultural policies. No investment by a non-resident has been rejected under
this authority, but in some instances investments have been altered pursuant to Investment Canada 15

14 Cultural business refers to the publication of books, magazines, periodicals or newspapers; production, distribution,
or sale or exhibition of film, video recordings, audio or video musical recordings; publication or dissemination of print
music; or radio, television, cable, or satellite broadcasting.
15 C.D. Howe Institute,A Capital Story: Exploding the Myths of Around Foreign Investment in Canada,” p. 21.

Figure 4. Net Inward FDI Flows from All Countries: 2001-2006
Source: Economist Intelligence Unit
The last Liberal government of PM Paul Martin introduced legislation to provide for a review of
foreign investment for national security concerns. Under the legislation (Bill C-59, which
received first reading on June 20, 2005), any direct or indirect investment can be subject to
additional review under the Investment Canada Act if it could be “injurious to national security,”
although that phrase is not further defined. An investment found to be “injurious” could be
blocked or conditions could be placed on the transaction. Critics claim that the bill would
introduce uncertainty into the investment process, at a time when investment in Canada is 16
declining. The measure was not acted upon. Others warn that diversion of resources through
increased FDI such as Chinese investment in the oil sands could have political implications for
U.S.-Canadian relations.

Both the United States and Canada are considered to have relatively open and transparent trading
regimes. Both are signatories to the World Trade Organization (WTO) and are bound together by
the North American Free Trade Agreement. However, irritants in the relationship do exist and
each party has issues with the way the other conducts the bilateral trade relationship. Some
disputes have been adjudicated by WTO and NAFTA dispute settlement procedures and others
have been the subject of regulatory actions by the United States or Canada.

Bill C-59: Foreign Investment Will Become Unpredictable and Politicized if Ottawa Caves into Vague National
Security Concerns, National Post, July 19, 2005.

Softwood Lumber . On April 27, 2006, the United States and Canada reached an agreement to
resolve the longstanding softwood lumber dispute, perhaps the most intractable trade dispute 17
between the two nations. This agreement, however, has now become the subject of arbitration
between the two countries. The 2006 agreement was signed in Ottawa on September 12 by USTR
Susan Schwab and Canadian Trade Minister David Emerson. The agreement was implemented on
October 12, 2006. This follows a summer in which the Canadian government of Prime Minister
Stephen Harper enlisted support for the agreement among Canadian provinces and among what 18
he called “a clear majority” of the Canadian lumber industry. The Canadian Parliament
approved legislation implementing the agreement on December 14, 2006.
The present incarnation of the dispute began when the Softwood Lumber Agreement (SLA)
between the United States and Canada expired on April 1, 2001. This agreement, implemented in
1996, set a tariff rate quota on exports of softwood lumber to the United States from four
Canadian provinces at 14.7 billion board feet per year and set fees for exports in excess of that
amount. U.S. lumber producers contend that Canadian provinces subsidize their lumber industry
by charging less than market value for lumber harvested in the form of stumpage fees and other
practices. U.S. timber and environmental groups have also expressed concern about Canadian
forestry management and clear-cutting practices and allege that such practices lead to dumping.
The Canadian government has rejected these allegations and has demanded free trade in lumber.
It has asserted that Canadian mills have modernized and are more efficient than U.S. operations.
The SLA ends all antidumping and countervailing duty litigation and return $4 billion of the
estimated $5 billion in antidumping and countervailing duties collected since 2002 to the
Canadian lumber industry. The remaining $1 billion was split; half went to U.S. lumber
companies and the rest was used for a joint North American lumber initiatives and other
“meritorious initiatives,” such as possible Katrina rebuilding efforts.
The Canadian government implemented a supply management system for its lumber exports
involving export taxes and quotas based on the price of lumber. Under the agreement, if the price
of lumber remains above $355/thousand board feet, no quotas or tariffs would be imposed. If
prices fall below this threshold, each province could either choose to pay a sliding-scale export
tax that would increase as the price falls, or pay a smaller tax along with agreeing to a market
share limitation based on a province’s share of total exports to the United States. Under the
former, provincial producers would pay a sliding-scale export tax of 5% if prices fall below $350,

10% if prices fall below $335, and 15% if prices fall below $315. Under the hybrid methodology,

each province has a share of the U.S. market. Thus, if the benchmark price falls below $355, each
province’s exports would be capped at its share of 34% of the U.S. market with an export tax of
2.5%, its share of 32% of the U.S. market combined with a tax of 3% at prices below $335, and
its share of 30% of the U.S. market with a 5% tax at prices below $315.
The agreement lasts for seven years with an option of a two year renewal. Maritime provinces
(which have private timber ownership) and other producers not engaged in the litigation are
exempt from the agreement. The agreement also provides for a surge mechanism if exports from
a Canadian province exceed 110% of its allocated share. Conversely, if third country exports to
the United States increase by 20% in two consecutive quarters, Canadian market share decreases,

17 For more information, see CRS Report RL33752, Softwood Lumber Imports from Canada: Issues and Events, by
Ross W. Gorte and Jeanne J. Grimmett.
18Canadian Softwood Industry Support Enough for Deal to Proceed, International Trade Reporter, August 24, 2006.

and U.S. market share increases, Canada is authorized to refund any export taxes collected in that
Generally, proponents of the agreement view it as the best deal that could be obtained by
negotiation. To proponents, the alternative was continuing litigation, with its inherent risk and
uncertainty to each side. Through various restrictive mechanisms, U.S. producers would be able
to avoid free trade in lumber with Canada, which, they maintain, continues to subsidize its
producers through provincial ownership of Crown lands. U.S. producers would also able to keep
about 10% of the duties collected by the U.S. government despite a Court of International Trade
ruling that the Byrd Amendment did not apply to duties collected from NAFTA countries (see
below). Canadian proponents point out that Canadian producers would get most (80%) of their
antidumping and countervailing duties back. They contend that while trade is still managed,
proceeds of an export tax would be retained in Canada, rather than paying antidumping and
countervailing duties to the United States. Proponents in Canada also note that unless lumber
prices drop below the $355 benchmark, there will be no restrictions on the U.S. market. While
prices were above that level around the time the agreement was proposed, subsequently, lumber
prices have fallen dramatically. With lumber prices around $270 on the date of implementation
(October 12, 2006), the full 15% export tax will be applied.
Opponents of the deal include consumers of softwood lumber, such as U.S. homebuilder and
homebuyer groups, and Canadian opposition parties. The former claim that the deal will hurt
consumers through higher prices for new homes and materials for renovation. Canadian 19
opposition leaders attacked the deal as a “sell-out” to U.S. lumber interests. Some claim that the
agreement scuttles that NAFTA dispute settlement process, which they believe would have
provided Canada with an eventual victory in the dispute.
In April 2007, the United States requested consultations with Canada on various aspects of the
agreement. The United States sought clarification of several forest sector assistance programs
providing grants, loans, and tax credits by the Canadian federal government and the provinces of
Quebec and Ontario. The United States has also expressed concern about the administration of the
surge mechanism, claiming that Canada has not adjusted its export level triggers to reflect actual
consumption in the United States market. If Canada had done so, the United States claims,
additional export taxes would have been collected from lumber producers in British Columbia
and Alberta, provinces subject only to export taxes, and the quota would have been lowered for
provinces using the mixed quota-export system ( Ontario and Quebec). On August 13, 2007, the
United States made a formal request for arbitration on the export tax-quota issue and submitted its
first written arguments on October 19. On March 4, 2008, the London Court of International
Arbitrators agreed with the United States that Canada had not adjusted the trigger (surge) levels in
a timely manner, disagreeing with Canada’s contention that the adjustment triggers were intended
to take effect on July 1, 2007 rather than January 1 of that year. However, the arbitrators also
decided that the western provinces that collect only export taxes did not have to adjust their
trigger volumes based on a reading of the SLA. Because of this, Canada did not have to collect an
extra $75 million in export taxes from B.C. and Alberta. The arbitrators, whose ruling is final,

19 New Democratic Party leader Jack Layton, in “Revised Deal Ends Lumber Dispute,Toronto Star, April 28, 2006.

rejected the U.S. position that such adjustments had to be made regardless of whether the 20
provinces used the export tax or export tax and quota option.
Some members of Congress have criticized the enforcement of the SLA. For example, Senator
Snowe has called for a licensing system to require that importers of Canadian lumber certify that 21
shipments are entering in compliance with the SLA. On April 17, 2008, U.S. Customs and
Border Protection issued a final rule that prescribes the collection of certain entry data for lumber 22
imports to the United States in order to monitor compliance with the SLA.
The United States requested arbitration over the six provincial assistance programs on January 18,

2008 although it did not seek arbitration over the Federal Industry Long-Term Competitiveness 23

Initiative, a source of concern in the initial consultations. At the same time, USTR announced
that it was seeking information from Canada over a new federally administered “Community
Development Trust”designed to help “one-industry towns facing major downturns, or
communities plagued by high unemployment, or regions hit by layoffs across a range of sectors,” 24
according to Prime Minister Stephen Harper. Some fear this mechanism may provide support to
the Canadian lumber industry in contravention of the SLA.
Beef . On May 20, 2003, a case of bovine spongiform encephalopathy (BSE) or ‘mad-cow’
disease was detected on an Alberta farm, which was quickly quarantined. During the next three
years another 10 cases of BSE would be found. Concerns about the food supply caused the
United States, Mexico, Japan, and others to close their borders to Canadian live animals and beef
products. On August 8, 2003, the U.S. announced that it would begin to phase out the ban for
boneless sheep and lamb meat, and for boneless meat from cattle under 30-months. Mexico
announced a similar phase-out on August 11, 2003.
The process for reopening the border to live animals began with a U.S. Department of Agriculture
(USDA) rulemaking proceeding initiated in November 2003. During a visit to Canada in
December 2004, President Bush reportedly assured then-Prime Minister Paul Martin that the
border would be reopened to Canadian live cattle. The USDA published a final rule on January 4,
2005 that allows for importation of ruminants from minimal-risk regions. Canada’s regulatory
system has been deemed to qualify for minimal-risk designation for live cattle and bison under 30
months of age and sheep and goats under 12 months. This rule was challenged in U.S. District
Court by the Ranchers-Cattleman Action Legal Fund (R-CALF) and a preliminary injunction th
preventing the implementation of the final rule was granted on March 2, 2005. The 9 Circuit
Court of Appeals overturned this ban on July 14, 2005. On July 18, 2005, the first live cattle were 25
shipped across the border from Ontario to New York state.

20Softwood Lumber Arbitration on Surge Provisions Yield Split Decisions,” Inside U.S. Trade, March 7, 2008;
Canada, U.S. Continue to Disagree Over Arbitration Ruling on Softwood Lumber,” International Trade Reporter,
March 6, 2008.
21Snowe Discusses Softwood Lumber Issues at Pleasant Valley Lumber Facility in Dover-Foxcroft,” Press Release,
March 17, 2008
22Entry of Softwood Lumber Products from Canada,” 73 Federal Register 20782, April 17, 2008.
23U.S. Requests Arbitration with Canada on Assistance Programs,” Inside U.S. Trade, January 25, 2008.
24 quoted in “Canadian Aid Plan for Embattled Industries Draws U.S. Fire as Subsidy for Lumber Sector,”
International Trade Reporter, January 17, 2008.
25 Congress Daily, July 19, 2005.

While the lifting of the ban disappointed U.S. rancher groups such as R-CALF, other American
agriculture organizations were pleased with the ruling. Processors, who had been facing losses as
more processing facilities were established in Canada, supported the ruling as other cattlemen
saw this measure as leverage to reopen the Japanese and other markets which have been closed to
American farmers since the discovery of a BSE case in Washington state. Export Development 26
Canada estimated that the total cost of the ban to the Canadian economy about $6 billion.
USDA released a final rule to allow for the importation of Canadian live cattle above age 30 27
months on September 14, 2007. This rule was accompanied by a notice of implementation of a
delayed portion of the first rulemaking allowing beef imports over 30 months and became
effective on November 19, 2007. Resolutions have been introduced in both the House (H.J.Res.

55, Herseth-Sandlin) and Senate (S.J.Res. 20 Dorgan) to block implementation of the final rule.

In addition, R-CALF and several consumer and health organizations have filed suit to block the 28
implementation of the final rule.
Agriculture Subsidies . On December 17, 2007, the WTO established a combined panel at the
request of Canada and Brazil over U.S. trade-distorting farm subsidies. The request alleges that
these subsidies, known in WTO parlance as “amber-box” subsidies exceeded the levels allowed in
years 1999-2002 and 2004-5. Under the WTO Agreement on Agriculture, the United States is
permitted $19.1 billion in these types of subsidies. Canada alleges that certain subsidies the
United States claims as non-trade-distorting properly should be classified as trade-distorting
subsidies, and that if they were, the United States would breach its WTO subsidy level
commitments. This request supersedes an earlier one filed by Canada in June 2007 that also 29
challenged U.S. export credit guarantees. That issue is not included in the current request.
Intellectual Property Rights (IPR) . As in previous years, the U.S.Trade Representative placed 30
Canada on its Special 301 watch list for intellectual property rights protections in 2008. The
watch list, the mildest category of rebuke, indicates that the listed trading partner “merit[s]
bilateral attention to address IPR problems.” The United States urged Canada to implement the 31
World Intellectual Property Organization’s Copyright treaty, which has been signed but not
ratified by Canada. The United States also expressed concern about trade in pirated and
counterfeit goods in Canada, as well as the transhipment and transiting of such goods. The United
States urged Canada to adopt tougher border security measures to crack down on this trade,
including allowing for the seizure of pirated and counterfeit goods without a court order.
However, USTR commended Canada for cooperation on bilateral and multilateral IPR initiatives,
including the proposed Anti-Counterfeiting Trade Agreement (ACTA).

26 EDC Weekly Commentary,Mad Cow Roundup,” August 3, 2005. http://www.edc.ca/docs/ereports/commentary/
27 72 Federal Register 53314, September 18, 2007.
28 “R-CALF, Others File Lawsuit to Halt Opening of Canadian Border Beef Trade,International Trade Reporter,
November 8, 2007.
29 For further information, see CRS Report RL34351, Brazil's and Canada's WTO Cases Against U.S. Agricultural
Support, by Randy Schnepf.
30 United States Trade Representative, 2008 Special 301 Report, p. 39. Available at http://www.ustr.gov/assets/
31 The WIPO Copyright treaty updates existing copyright protections for Internet and other electronic media.

Culture . Canada has long been concerned that its culture is in danger of being overwhelmed by
that of the United States, which, in terms of population and GDP, is about ten times the size of
Canada. Claiming a need to maintain its cultural identity, Canada has implemented regulations to
promote Canadian ownership of film distribution; to encourage Canadian content in radio/TV
programming; and to restrict the distribution of foreign magazines. The United States has
challenged many of these restrictions, arguing that such laws are disguised protection that denies
opportunities to U.S. firms. Canada had its cultural industries exempted from NAFTA, subject to
extra U.S. retaliatory rights, and has resisted attempts to include cultural industries in WTO

The aftermath of the terrorist attacks on the United States on September 11, 2001 has increased
scrutiny of the Canadian border as a possible point of entry for terrorists or for weapons of mass
destruction. The potential for economic disruption caused by a terrorist attack on border
infrastructure or as a result of a border closure is large. For example, the Ambassador Bridge that
links Detroit and Windsor, Ontario is the largest trade link in the world, with more than 7,000
trucks crossing daily carrying goods worth more than $120 billion per year.
The cost of the border to carriers, manufacturers and governments in terms of delays and 32
compliance has been estimated by one survey at $7.5 billion to $13.2 billion annually. Using the
survey’s midpoint estimate, they estimate that costs related to transit time and uncertainty total $4 33
billion and trade policy related costs were estimated at $6.28 billion. The total midrange figure,
$10.3 billion, reflected 2.3% of cross-border trade in 2004. Another report claims that average
processing times have increased 200% from 45 seconds in December 2001 to 2.15 minutes in
December 2004. This report also claims that additional reporting, compliance, and delays add
approximately $800 to the cost of every North American produced vehicle and that the border 34
“threatens to become the greatest non-tariff barrier the world has ever seen.” However, a July
2007 study indicated that increased border security has not affected Canadian export volumes to
the United States through most land ports, although the study found evidence that substitution 35
between ports may have occurred.
Western Hemisphere Travel Initiative (WHTI) . A provision of the Intelligence Reform and
Terrorism Prevention Act of 2004 (P.L. 108-458), the WHTI required all travelers from Canada
and Mexico to present a passport or another form of secure documentation to enter the United
States starting January 1, 2007, for air travelers, and starting a year later for land passage.
Currently, most land travelers enter with a driver’s license or other form of government
identification. While travelers could use existing passports to cross the border, it is estimated that
only 20% of Americans and 38% of Canadian currently hold them. In response, the Department
of Homeland Security (DHS) and the Department of State (DOS) announced the establishment

32 George Jackson, Douglas Robideaux, and John Taylor, “The U.S.-Canada Border: Cost Impacts, Causes, and Short
to Long Term Management Options.” Available online at http://www.fhwa.dot.gov/uscanada/studies/taylor/
33 Ibid.
34 Coalition for Secure and Trade-Efficient Borders, “Rethinking Our Borders: A New North American Partnership,”
July 2005, available at http://www.cme-mec.ca/pdf/Coalition_Report0705_Final.pdf.
35 Conference Board of Canada, Tighter Border Security and Its Effect on Canadian Exporters, June 2007.

new form of identification known as the People Access Security Service (PASS) card. This card
would resemble many current driver’s licenses, but would contain a biometric identifier and
provide documentation of citizenship. Concerns have been expressed by the Canadian
government, by some business organizations on both sides of the border, and by some members
of Congress that the measure will impede travel and trade on the northern border. Some fear that
many border-area residents will not obtain the PASS card and will no longer make routine trips
across the border as they do currently.
The FY2007 Homeland Security Appropriations Act (P.L. 109-295) directed the Secretary of
Homeland Security, in consultation with the Secretary of State, to develop a plan to implement
the WHTI and to certify to Congress that certain criteria (standards for the card, the fee for the
card, technology sharing with Canada and Mexico, and installation of infrastructure and training
at border crossing to process the cards) included in the act are met (Sec. 546). The act provides
for the program’s implementation by the earlier of three months of the certification or June 1,
2009. In December 2007, the Consolidated Appropriations Act of 2008 (P.L. 110-161) amended
that language to provide that the plan shall not take effect until the later of three months after the
certification of the plan or June 1, 2009. Nonetheless, DHS tightened the requirements on the on
January 31, 2008 to require written documentation of citizenship such as a passport or both a 36
birth certificate and driver’s license to denote identity and citizenship.
Action Programs and Initiatives . In order to address what became a threat of border disruptions,
the two governments agreed on December 12, 2001 to a (now) 32-point Smart Border Action Plan
consisting of 4 pillars: the secure flow of people, the secure flow of goods, a secure infrastructure,
and coordinated enforcement and information sharing. The pillar concerned with the flow of
goods consists of initiatives on harmonized commercial processing, clearance away from the
border, joint or shared customs facilities, enhancement of information sharing, container targeting
at seaports, and infrastructure improvements. This initiative was updated in the NAFTA context
by the Security and Prosperity Partnership of North America (SPP). The SPP was launched at
a summit of the leaders of the three countries at Crawford, Texas on March 24-25, 2005. The
initial harvest of security results included border improvements, land preclearance measures, and 37
joint port security exercises, many of which are follow-on to the 32-point Action Plan. The
leaders met again in Cancun, Mexico, in March 2006, Montebello, Quebec in August 2007, and 38
New Orleans, Louisiana in April 2008.
The Free and Secure Trade (FAST) is a joint program implementing the harmonized commercial
processing initiative. It is open to participants in the U.S. Bureau of Customs and Border
Protection’s (CBP) Customs-Trade Partnership Against Terrorism (C-TPAT) and the Canadian
Border Security Agency’s Partners in Protection (PIP) Program. Participants of these programs
undertake audit-based compliance measures to enhance security along the supply chain and
receive certification as low-risk shippers. Since 2003, CBP has validated over 6,900 companies in 39
the C-TPAT program. The FAST program provides for dedicated inspection lanes to goods
carried by approved lower-risk shippers, to goods purchased from pre-authorized importers, and

36 DHS Press Release, January 18, 2007, http://www.dhs.gov/xnews/releases/pr_1200669485238.shtm
37NAFTA Ministers to Review Proposals for Integrating Economies, Inside U.S. Trade, May 13, 2005.
38 For further information, see CRS Report RS22701, Security and Prosperity Partnership of North America: An
Overview and Selected Issues, by M. Angeles Villarreal and Jennifer E. Lake.
39 U.S. Customs and Border Protection (CBP), Customs-Trade Partnership Against Terrorism: A Year in Review,
January 31, 2008

to goods transported by pre-authorized drivers and carriers. FAST transit points are operational at

21 high-volume land ports of entry on the northern border. According to CBP, more than 87,000 40

commercial drivers were enrolled in the program as of April 2008.
A complementary program to expedite the secure movement of people has also been established.
The NEXUS program provides an identification card and dedicated traffic lanes to frequent
travelers who have undergone security clearances on both sides of the border. The NEXUS is
seen as especially important to minimize the disruption of cross-border trade in services, which
relies on the free movement of skilled labor. NEXUS was utilized by 128,000 participants and
was operational in 11 high-volume border land crossings, 8 airports in Canada, and 33 marine 41
crossings by August 2007. Also, according to CBP, the NEXUS card will constitute a valid form
of identification for the WHTI.
The 32-point action plan also called for increased monitoring and targeting of containers off-
loaded at Canadian and U.S. ports in transit to the other nation. The U.S. Container Security
Initiative (CSI) is designed to prescreen high risk containers entering the United States at
overseas ports of departure. The program is working to develop security criteria to identify high
risk cargo, to develop and utilize technology to pre-screen high risk containers and to encourage
the use of secure containers. U.S. customs agents work alongside Canadian agents in the CSI
ports of Halifax, Montreal, and Vancouver to identify cargo for screening. Canadian customs
agents are stationed in the ports of Newark and Seattle-Tacoma. These agents have no
enforcement power on the other country’s territory; they serve in an advisory capacity.
The Canadian government has implemented a package of port security initiatives that included
increased screening of marine traffic, “real-time” identification and monitoring of vessels in
Canadian waters, radiation screening equipment for containers, and enhancements to portside
Emergency Response Teams of the Royal Canadian Mounted Police. These initiatives respond to
concerns within Canada that differences in port security were affecting the ability of Canadian
ports to compete as entry points for goods eventually entering the U.S. market. The United States
and Canada have also reached agreement on a program of increased screening and monitoring of
railway shipments between the two countries. Under this program, railcar cargo detection
equipment known as the Vehicle and Cargo Inspection System (VACIS) has been installed at
seven rail crossings in the United States and one in Canada.
Land preclearance away from the border by U.S. and Canadian customs agents working in each
other’s territory remains a contentious issue. Although a jointly commissioned study has detailed
the operational benefits of cross-border operations, several legal and institutional issues remain
unresolved including land ownership, the enforcement powers of such agents and their ability to
carry firearms. However, negotiations to implement a pilot program at the Peace Bridge crossing
at Buffalo-Fort Erie reportedly broke down in May 2007 over fingerprinting of Canadians who 42
approach but decide not to cross the border. Canadian law does not allow for fingerprinting
unless a person is charged with a crime or volunteers to be fingerprinted.

40 CBP, Free and Secure Trade Factsheet, http://www.customs.gov/linkhandler/cgov /newsroom
41 CBP, NEXUS Factsheet, http://www.customs.gov/linkhandler/cgov/newsroom/fact_sheets/travel/nexus_fact.ctt/
42 “Shared Inspection Plaza Concept Dropped,Buffalo News, 26 April 2007.

A related issue is the ability of the transportation infrastructure to cope with increased security
measures. The aging condition and limited capacity of the land border infrastructure preceded the
terrorist attacks on September 11, 2001. The Ambassador Bridge and the Detroit-Windsor Tunnel,
which together carry 25% of total U.S.-Canada cross-border traffic, both opened in 1930. The
Peace Bridge linking Buffalo NY and Niagara, Ontario was opened in 1927 and is 3 lanes wide.
Approaches to the bridges, often city streets, have been criticized as inadequate to the commercial st
needs of the 21 century.
This issue, in turn, affects the efficient implementation of security measures. The FAST system
provides for dedicated lanes at land border ports for expedited preclearance. However, these lanes
will not save time if the FAST participant cannot access this lane due to congestion or delays at
the points of access. The SPP completed a pilot program that attained a 25% improvement in
border crossing times at the Detroit-Windsor gateway in December 2005, yet the aging and
adequacy of the border infrastructure may affect whether such improvements are sustainable. A
binational partnership to construct additional crossing capacity at the Detroit-Windsor gateway is
engaged in technical and environmental assessments of potential new crossing sites; however, the
opening of new bridge or tunnel capacity is not envisioned before 2013.

Economic Integration . The terrorist attack of September 11, and its aftermath, have sparked a
wide-ranging debate in Canada over its relationship with the United States, including the
feasibility or desirability of furthering the process of North American integration. The extent to
which the two economies are integrated was dramatized by the adverse impact that border
closings had on trade flows after the terrorist attacks. While concerns in the United States over the
U.S.-Canada border are focused primarily on border security and immigration issues, the debate
in Canada has become much broader, encompassing such issues as the nature of sovereignty, the
desirability and feasibility of further economic integration with the United States, and even the
adoption of the U.S. dollar. This discourse is not unusual in Canada; questions concerning
relations with the United States continually loom large in policy discussions. Such discussions are
unusual in the United States, and at this point they are generally confined to the types of security
measures described in the preceding section.
Certain aspects of increased cooperation with the United States on border and immigration issues
have proved controversial to some Canadians. These questions generally have taken the form of
resistance in some quarters to the notion of harmonization of U.S. and Canadian regulations. A
segment of Canadian public opinion fears that, due to the wide disparity in population and
economic power of the two nations, harmonization of customs and immigration regulations
would inevitably lead to adoption of U.S. standards, and implicitly, the policies behind them.
Moreover, according to this view, Canadian resistance to this harmonization could imperil the
economic relationship with the United States. However, others contend that Canadian and U.S.
regulations affecting the border are more similar than different and would be for the most part
compatible. Hence, the scope of coordination in certain areas of border management may be
acceptably encompassed by mutual recognition of each other’s regulations.
Others in Canada believe the lesson from September 11 is that increased cooperation with the
United States is both necessary and inevitable, given the reality of Canadian trade flows and
economic interdependence. Yet, they believe such integration must be managed to assure Canada
protects its interests and its sovereignty. Several economic options have received renewed

attention in Canadian policy circles, from greater regulatory harmonization to more long-term
options including a security perimeter, a customs union, a common market, or a monetary union.
The latter also received attention due to the long-term slide of the Canadian dollar up to 2002.
However, the appreciation of the Canadian currency by 30% against the U.S. dollar since has
eclipsed such discussions. These concepts are not new, and they have been discussed in
conjunction with “deepening” the North American Free Trade Agreement. Consequently, these
discussions often involve Mexico as well.
NAFTA Plus . There has been renewed discussion of ways to enhance cooperation between the
three NAFTA partners. The concept of deepening NAFTA-”NAFTA plus”-has taken on added
salience, in some quarters, since most of the gains resulting from tariff reduction of the agreement
have been realized. In addition, FTAs negotiated by the United States and Canada with other
trading partners have diminished the relative advantage of NAFTA. In addition, since the 2001
terror attacks there has been a perception by some in Canada and Mexico that continued
economic access to the U.S. market is dependent on greater security cooperation with the United
States. Former U.S. Ambassador Paul Cellucci notably said in 2003 that “security trumps trade” 43
in the U.S.-Canada relationship. This realization has led to many border initiatives described
The Security and Prosperity Partnership (SPP), contains many initiatives that could lead to some
measure of regulatory harmonization among the United States, Canada, and Mexico. In addition
to calling for implementation of common border security strategies, the SPP initiates cooperation
in energy, the transportation network, financial services, and standards harmonization. Ten
Ministerial working groups were formed and were required to report after 90 days, and semi-
annually thereafter. Reportedly, the scope of SPP activity is in the realm of regulatory changes, 44
actions that do not require legislative activity.
The initial report was released on June 27, 2005. The Prosperity component of the SPP intends to
enhance competitiveness by developing proposals to streamline regulatory processes among the
three partners, enhance detection and prevention of counterfeiting and piracy, and liberalize rules
of origin. Sectoral initiatives on steel, autos, energy, air transport, and e-commerce are also
envisioned. Quality of life cooperative initiatives on pollution, agriculture and food supply, and 45
health issues were also launched. Since the initial report, the United States and Canada have
agreed to facilitate the exchange of information on infectious disease outbreaks, concluded an
open sky agreement, and signed a memorandum of understanding on pipeline safety. In June
2006, the three nations launched a North American Competiveness Council, which is made up of
business leaders from each nation who will examine proposals and provide recommendations to
improve the competitiveness of North American business in global markets.
Security Perimeter . One approach envisioned by some U.S. and Canadian business leaders and
policy advocates is to create a North American security perimeter. This proposal responds to U.S.
fears of terrorism by removing the security functions from the border to the point of first contact
of a good or person to North America. Thus, the container landing at the Canadian port of Halifax
headed for the United States would be inspected in Halifax, not at the U.S. border, thereby

43 “Cellucci’s Message, National Post, March 26, 2003.
44NAFTA Ministers to Review Proposals for Integrating Economies, Inside U.S. Trade, May 13, 2005.
45 Security and Prosperity Partnership of North America, Report to Leaders, June 2005,

avoiding delays at border choke-points. Pre-screening of passengers would also take place at the
point of landing, not at the border. However, a completely seamless border for goods would also
require standards harmonization or acceptance of the inspecting party’s standards, information
sharing on threat assessments, and trust in each party’s screening procedures. It also makes the
assumption that there are no terrorist threats indigenous to the North American security perimeter.
Customs Union . Another step discussed in policy circles regarding the further integration of the
North American economy is the creation of a customs union. Members of a customs union
commonly eliminate tariffs among themselves, and erect common barriers against the rest of the
world. Both the U.S. and Canada have already eliminated all tariffs between each other under
NAFTA, and have similar, though not identical, tariff schedules with third countries. Because all
customs duties would be paid at port of entry at the perimeter of the customs union, the need for
customs agents on the U.S.-Canadian land border to collect revenue would be obviated. However,
border agents also enforce immigration, sanitary and phytosanitary, and environmental laws. A
customs union does not imply a harmonization or mutual recognition of each nation’s regulations.
Thus, a national presence at the border would continue to be necessary. It is also unclear in what
form current trade remedy practices could be continued under a customs union. Such actions
against third countries could continue relatively easily if both sides found it necessary; however,
actions against each other would require the continued payment of duties at the border.
Common Market or Economic Union . Deeper integration of the North American economic space
would imply some form of common market or economic union. A common market area would
add free movement of labor and capital; thus, immigration and investment regulations would need
to be harmonized or mutually recognized. In addition to a common tariff policy and free trade in
goods and services, a common market would imply free movement of capital and labor. At this
point, harmonization of certain investment and immigration issues would need to be agreed upon.
A type of economic union approaching that of the European Union would also require
harmonized or mutually recognized standards and regulations and perhaps some supranational
institutions. Although the United States and Canada share many developed country level
standards, this form of integration would still need to be meticulously worked out. For example,
would the United States adopt the metric system to fulfill its obligations to harmonize standards?
Could the two nations adopt common forestry prices and management policies and thereby help
resolve the softwood lumber dispute? Would either nation allow supranational entities to overrule
laws passed by Congress or Parliament? These questions illustrate the extent to which North
American economic integration would affect the governance of the United States, Canada, and
possibly Mexico.
Monetary Union . Another discussion recurrent in many Canadian policy circles is that of
monetary union with the United States. This potential goal has been discussed in many forms.
The Canadian dollar could be linked in value to the U.S. dollar; Canada could adopt the U.S.
dollar; or a new North American currency (called the Amero by one proponent) could replace the
U.S. and Canadian dollars, and perhaps the Mexican peso. Generally, talk of monetary union
north of the border is strongest during times of relative weakness of the loonie vis-a-vis the U.S.
dollar. The recent strength of the loonie has diminished such discussion, although the idea still
has some proponents.
Those who support monetary union argue that it would force Canada to make the necessary
structural adjustments that would make it more competitive with the United States. In other
words, dollarization or a currency union would remove the ability to cushion adverse economic
conditions through depreciation of the currency. By tying the loonie to the U.S. dollar or by

adopting the dollar outright, Canada would be making the unmistakable commitment to converge
with U.S. macroeconomic policy. Then Canada would be able to reap the benefits of U.S. policy,
which traditionally have been lower inflation, lower interest rates, and higher levels of growth
than Canada has experienced. In addition, the savings in trade transaction costs would be
significant for the volume of trade the two nations conduct.
Canadian opponents of monetary union contend that it would lead to an unacceptable loss of
political and economic sovereignty. Monetary policy would be dependent on (or tied to) actions
of the U.S. Federal Reserve. Thus, the Canadian government would be left with fewer levers to
combat inflation or fight recession. In a monetary union in which macroeconomic convergence is
reached, this point may not be important. To opponents of monetary union, however, the two
economies respond differently to events, and thus need to utilize different adjustment
mechanisms. Furthermore, with a population and economy smaller than some Federal Reserve
districts, Canada’s ability to influence U.S. monetary policy in a monetary union likely would be
Ian F. Fergusson
Specialist in International Trade and Finance
ifergusson@crs.loc.gov, 7-4997