Is Canada the Top US Trade Partner?

The bilateral free trade agreements (FTAs) between the United States and Canada in 1988 and 1994 have hastened the progress of economic integration between the two countries. Both have prosperous industrialized economies with comparable living levels and industrial configurations. The two economies do not, however, differ in terms of size, productivity, net savings, or per capita income.

The United States' largest trading partner

in terms of population is Canada. The total value of goods traded with Canada in 2009 was $204.7 billion in exports and $224.9 billion in imports. For the first time since 2007, China has surpassed Canada as the main supplier of goods to the United States, a trend that has persisted ever since. Although trade is a significant aspect of the Canadian economy, the United States is by far the country's main trading partner with Canada. The main sector of traded items consists of cars and auto parts, a highly interconnected industry as a result of free trade. Additionally, Canada is the country that exports the most energy to the US. Similar to the US, China's rise to prominence in the global economy has an impact on the Canadian economy. Through foreign direct investment, the US and Canada both hold sizable economic interests in one another.

The border between the United States and Canada gained prominence after the terrorist attacks of 2001. A number of bilateral efforts have been made to reduce the amount of disruption that increased border security will cause to trade. Some have expressed a renewed interest in further economic integration as a result of the border focus, either through little steps like increased regulatory cooperation or possibly broader objectives like a customs or monetary union. The main areas of interest for Congress have been trade disputes and whether or not the two countries can maintain their historical level of trade while maintaining strict border security.

Both nations are parties in the NAFTA with Mexico and members of the World Trade Organization (WTO). Even while most trade is performed amicably, there are still a few problematic issues. Arbitration is being used to settle disputes pertaining to the 2006 softwood lumber accord, and Canada has requested WTO discussions regarding the criteria for country-of-origin labeling. In addition, because of concerns about the enforcement of intellectual property rights, the US has added Canada to its Special 301 priority watch list. Canada has also voiced strong opposition to the economic stimulus package's "Buy American" provisions being implemented.

Comparing the US and Canadian economies

The North American Free Trade Agreement (NAFTA) of 1994 and the bilateral U.S.-Canada Free Trade Agreement (FTA) of 1989 have hastened the progress of economic integration between the two countries. Refer to Table 1. For Canada, this significant and historical gap has brought both opportunities and difficulties. NAFTA gives Canada access to a sizable market for its exports, but it has also made it more difficult for small Canadian enterprises to compete in the import market. A slowdown in the U.S. economy or adjustments to the bilateral exchange rate also have a disproportionate effect on the Canadian economy.

Canada's average yearly real GDP growth rate throughout the last ten years, starting in 2001, has been 1.9% higher than the US's. Throughout the period, the average annual growth rates per capita have followed a similar, if weak, trajectory (0.82% vs. 0.62%). In terms of purchasing power parity, the per capita income in Canada has stayed mostly stable at 84% of that in the United States. Policymakers in Canada are concerned about the ongoing disparity in per capita income because it casts doubt on the country's competitiveness and productivity.

The GDP's sectoral components

are comparable between the US and Canada. The services sector accounts for more than two thirds of both economies, but its share of GDP in the US is higher (76.9% vs. 70.9%). Even while the manufacturing sector's share of GDP has decreased over time in both nations—from 27.2% to 22.2%—it is still comparatively more significant to the Canadian economy. The remaining 1.9% of the Canadian economy and 1.2% of the US economy are derived from agriculture.

Canada and the US have different savings and investment policies. Canada avoided deficit spending in the 1990s as a result of its experience with fiscal mismanagement in the 1970s and 1980s. Between 1997 and 2008, the Parliament passed balanced budgets on a regular basis. In addition, Canada reduced its public debt to GDP ratio from 100% in 1996 to 61.3% in 2008. However, the 2009 stimulus budget brought back deficit spending, and the public debt to GDP is currently back at 84.0%. Although the debt-to-GDP ratio in the US is lower than in other countries, it has been rising and reached 62.9% of GDP in 2010 as a result of years of deficit spending.