A tale of two countries

Our economies are headed in different directions, but Canadians mustn't forget that their economic future is heavily dependent on the U.S.

Sommet de Montebello - 20 et 21 août 2007

Par Earl H. Fry

I am now entering my fourth decade as a foreign observer and commentator on Canadian politics and economics. I cannot remember a time when the Canadian economy has been in such great shape.
The Canadian GDP is growing robustly and will surpass $1.5 trillion in 2007. The loonie is approaching par with the U.S. dollar and Canada's merchandise trade surplus with the United States edged toward $100 billion last year. The stock market is at record levels, this week's dip aside, and unemployment is at 33-year lows.
For decades, I observed a spending spree in Ottawa that resulted in deficits in 34 out of 36 years and plummeted Canada to near the bottom of the G7 countries in government debt as a percentage of GDP. Today, of course, Canada stands alone among G7 countries in its debt-reduction performance, having recorded surpluses each and every year since 1997.
On the surface, the United States also seems to be doing well economically. The economy has grown for 65 straight months, the stock market has attained record highs, and the unemployment rate stands at a very low 4.5 per cent. However, this rosy picture may be masking some disturbing trends. Washington's debt is now approaching $9 trillion U.S., up dramatically from 1982 when it first surpassed $1 trillion.
Foreign investors are now stepping in to buy half of the federal government's IOUs, up from 15 per cent during the Reagan years. The United States is also the world's largest external debtor nation with about $3 trillion in debt, in sharp contrast to most of the 20th century when the U.S. ranked as the world's largest creditor country.
Its trade performance has been abysmal and in 2006 alone its merchandise trade deficit stood at $838 billion. Germany and China have surpassed the U.S. as the world's leading exporters, and China will soon assume the No. 1 slot.
The U.S. health care system is out of control and beginning to hurt the nation's business competitiveness.
Spending on health care is about 16 per cent of GDP, far more than any other nation, and still 45 million Americans have no health insurance at all. The Big Three automakers have shifted significant production into Canada because they can save more than $1,000 U.S. per car on health care costs alone, and other companies are offshoring production for the same reason.
With the impending retirement of the first wave of baby boomers over the next few years, Social Security, Medicare, and Medicaid obligations are going to explode and Washington is ill-prepared to cope with this demographic time bomb.
America's "unipolar moment" is also likely to end within the next few years.
Iraq has been a terrible burden in terms of lives, finances, and America's reputation abroad. The U.S. now spends as much on its military as the rest of the world's countries combined. When the new president takes office in January 2009, major changes should be expected in America's overseas commitments.
In addition, will there come a time when foreigners will not be there to buy so much of Washington's debt, or will foreign oil producers begin to demand payment from the United States in currencies other than the U.S. dollar? Such scenarios could greatly exacerbate what is already a volatile economic and political outlook.
Much of Canada's recent economic success is based on record prices for natural resources and its privileged trading position with the United States as a result of the Canada-U.S. Free Trade Agreement, which went into effect in 1989, and NAFTA, which superseded it in 1994.
The commodity boom will probably last for a few more years, but it will eventually end and there will be a "bust" in various parts of the country.
The federal government must prepare for this eventuality by continuing to reduce its overall debt and by establishing a special resource savings account patterned after Norway's Petroleum Fund. Greater emphasis must also be placed on developing the most important resource of the 21st century -- human capital. Education at all levels must be improved in Canada and skills training given a renewed emphasis. The Canadian economy must become much more diversified with greater emphasis on high technology.
With so much of Canadians' economic well-being dependent on privileged access to the United States, this cross-border link must be safeguarded and even enhanced, especially during a period when many Canadian manufacturers are going to suffer because of the resurgent loonie.
NAFTA will be fully implemented next year and Ottawa should be leading the way in pushing for new "NAFTA Plus" negotiations with some form of customs union and perhaps even the free movement of labour on a bilateral basis with the United States. The United States will face some ominous challenges over the next several years, but it is a resilient and entrepreneurial country and will find a way to muddle through.
Americans could learn a great deal from Canadians regarding health care, urban management, balancing government budgets, conducting election campaigns, limiting the influence of special interests, and curbing gun-related violence.
Canadians in turn should fully appreciate their comparative advantage in having secured almost unimpaired access to their neighbour to the south with its 302 million consumers and over $13-trillion U.S. annual GDP.
Despite its occasional ups and downs, the bilateral relationship is still the most expansive and vibrant in the entire world, and will continue to be so for the foreseeable future.
Earl H. Fry is a professor of political science and endowed professor of Canadian studies at Brigham Young University.

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