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September 28, 2011

Where U.S. economic problems leave Canada

The Canadian Charger

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When the United States sneezes, Canada gets pneumonia. The U.S. is our largest trading partner. We sell more to them than to anyone else in the world, and they are also our biggest source of imports. As a result, we are heavily reliant on the U.S. market.

They are also heavily reliant on us, both as a source of raw materials such as oil and as a market for manufactured goods. In terms of imports from the U.S., we are either first or second (to China).

The American government has been engaged in a fierce battle between Congress and the White House over how to address their deficit and debt.  At the final minute, they worked out a deal to raise the debt limit in exchange for a plan to cut expenditures over the long haul, but President Obama was unable to get Republicans, who control the House of Representatives, to agree to increase taxes on the ultra-rich.  The obvious place to cut would be on the military, which swallows huge sums.  However, the Republicans will be reluctant to see that happen.  As a consequence, it is social spending that is likely to feel the axe. 

Since social spending lubricates the economy, cutting back in that area will tend to slow the economy.  While corporate profits in the U.S. continue to be healthy, unemployment remains a drag on the economy. In the medium term, that does not bode well for consumer confidence and consumer spending.  The consequence will likely be a slow-down in the U.S. economy.  That will mean less demand for the raw materials that are our key exports to the U.S., especially oil.  We may be on the brink of the second phase of a double-dip recession in the U.S., which would mean a significant decline in our exports to the U.S.  We would also likely follow into recession again in such a situation.

Prime Minister Harper is doing one thing right in courting Brazil, though the benefits of increased trade with that country are limited by the fact that both countries are resource exporters and therefore tend to be competitors.  Yet, Brazil is the world’s seventh largest economy and its economy is growing rapidly.  They may be a market for Canadian construction industries, for roads and other infrastructure.

The fall in the stock market reflects growing unease with how the U.S. is dealing with its debt crisis and with the serious weakness in European economies, marked by serious question about the safety of the bonds of several European nations.  Canada’s bonds and banks are quite secure, but money goes across boundaries and seeks a balance between security and return.  Money is fleeing the European countries and the stock market.  Marx said that workers have no fatherland.  The truth is that capitalists have no fatherland.  So as the U.S. stock markets plunged because of the confusion around the U.S. debt crisis and the threat of European bond defaults, Canada has been caught up in the draft.  Our stocks also sank.  Money has tended to go to gold and, paradoxically, to U.S. government bonds, in spite of the Standard and Poor’s downgrade of U.S. debt. 

The obvious route for Canada to take would be to diversify our trade and to become less reliant on imports.  Both of these alternatives are hindered by the degree of Canadian integration in the North American free trade system. 

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