On Thursday, Canada joined the EU, Brazil and Chile in demanding the withdrawal of tax credits in the U.S. for black liquor.

The credits are estimated at $4-8 billion, passed in 2007, and intended for energy alternatives in paper mills and cogeneration facilities.  Paper manufacturers have started mixing F-T diesel with a kraft process byproduct known as black liquor to meet the definition of the tax credit, which Canada claims is hurting Canadian jobs.

Although President Obama wants to terminate the rebate on Oct. 1, Canada and the other countries are threatening action through the World Trade Organization (WTO).

In light of a global recession caused by what some consider fiscal mismanagement and overzealous deregulation in the U.S., Canada’s controversial and convoluted trade relationship with the U.S. warrants greater scrutiny.

A Hole in Fortress North America

Despite promising to “fix” NAFTA, President Obama toned down the rhetoric on his last trip to Canada.  And for good reason – it’s the largest trade relationship in the world and the economies tend to move closely together, despite being structured and responding to shocks very differently.

But NAFTA is 15 years old, and hasn’t taken into consideration changes in the world economy, or adequately addressed border security, climate change and energy issues.

The trade relationship with American has also become a political issue, with the far right openly espousing a duplication of American economic and social values.   Prime Minister Stephen Harper erroneously suggested that,

…Canada is confronted by the same threats from rogue nations equipped with ballistic missiles and weapons of mass destruction as is the United States.

James Laxer, in his book The Border: Canada, the US and Dispatches from the 49th Parallel, describes this position as follows,

Here was a theory of Canadian-American relations that allowed for no differentiation between the interests of the United States and those of Canada. If there were problems in the relationship, it was because Canadian leaders had been insufficiently devoted to supporting the United States on all essential matters of continental and global policy.

A 2003 Senate report by the Committee on Foreign Affairs, Uncertain Access: the Consequences of U.S. Security and Trade Actions for Canadian Trade Policy, looked at the interrelationship of security and trade between the two countries. They reiterated and clarified some of the misconceptions advanced by the American media,

Canada does not pose the risk to U.S. homeland security that so many Americans perceive… Studies reveals that Canada does not deserve its poor reputation as a gateway for illegal entry to the United States.

But Laxer explains that the U.S. actually poses serious security concerns for Canada; for guns, banned drugs, explosives, pornography, toxic waste, and some animals, plants and food products.  The U.S. also has about five times higher the number of illegal immigrants per capita than we do, so the rhetoric about immigration issues is a red herring.

Using the pretense of security issues, there have been a number of Canadians pushing for deeper integration in recent years.  Wendy Dobson of UofT’s Rotman School of Management suggested Canadians should trade American security interests for Canadian economic interests in her 2002 “Border Paper.”

Jack Granatstein, the chair of the Council for Canadian Security in the 21st Century and military history professor at York University, also supported deep integration using similar fear tactics of terrorism.  He said Canada had “no choice at all” but to comply with all American security interests, including National Missile Defence (NMD) system, which could start a whole new arms race.

For a military history professor, Granatstein and many other supposed “experts” fail to truly understand security threats.  Patrick Rael, an Associate Professor of History at Bowdoin College in Maine, explains,

Of all the misinformation, half-truths, and outright lies about terrorism put forth by the Bush Administration, none is as pernicious as the one repeated by Ambassador L. Paul Bremer last Friday during his talk at Bowdoin College on “Iraq and the War on Terrorism.” Echoing a claim Bush has frequently made since the attacks on September 11, 2001, Bremer asserted, with all the authority his 14 months as special envoy to Iraq confers, that Osama bin Laden and al-Qaeda attacked the U.S. because they “hate freedom.”

Finland, Finland, Finland. The country where I want to be, It’s the country for me.

Deeper integration with the U.S., especially military integration, actually makes Canadian security exponentially worse.  We would also be by-standers in any important decisions made, resulting in what Laxer calls a “Finlandization” of Canada,

…unlike the European case, where there was a balance in size and power among the states involved in opening frontiers, there is no such balance between Canada and the United States.  It would be the American way or the highway on… important matters that bear heavily on the kind of society Canadians want.

The Senate also heard submissions on this in their report,

…any proposals or measures that would sacrifice Canada’s capacity to independently determine its immigration, security and foreign policies in order to ensure that border crossings operate smoothly [would not] “buy” Canada any special treatment from U.S. authorities…

The answer to the border problem does not lie in the development of “strategic bargains” to remove border-related impediments to trade  …it is not clear that the Americans would ever be satisfied with sovereignty-restricting actions that we would take to boost security. They may continue to impose ever more stringent security-related measures at the border. Moreover, we want Canada to retain its decision-making ability in the important policy fields…

Loyalty From Canada’s Elites Not a Given

If there’s any doubt over autonomy issues, the third NAFTA partner, Mexico, is illustrative of what the consequences may be.  Last month tensions flared between the U.S. and Mexico over long-haul trucks.

Mr. Arturo Sarukhan, Mexico’s ambassador to the U.S. said in and article in the WSJ, Congress Doesn’t Respect NAFTA ,

Nobody can argue that Mexico hasn’t worked tirelessly for more than a decade to avoid a dispute with the United States over Mexican long-haul trucks traveling through this country… Unfortunately, Mexico’s forbearance only seemed to make matters worse…

In confronting this situation, the government of Mexico — after over a decade of dialogue and engagement in which it has asked for nothing more than U.S. compliance with its international commitments and with the rules of the game that provide for a level playing field — has had no alternative but to respond by raising tariffs on 90 U.S. products that account for approximately $2.4 billion in trade. It is worth noting that this takes place shortly after Mexico announced it would unilaterally reduce its industrial tariffs from an average of 10.4% in 2008 to 4.3% by 2013, and that it has underscored its commitment, along with its other G-20 partners, to push back on protectionist pressures.

Laxer also points to legal concerns raised by former Canadian foreign minister Lloyd Axworthy, who said,

What does a Canadian soldier do if asked to handle land mines on Canadian soil, in contravention to our treaty undertakings?  What if we apprehend someone considered a war criminal…?  U.S. law would prevent them being turned over to the [International Criminal Court], while our obligations require it.

So will Canada always look out for its best interests?  Not necessarily.

The current debate on deeper integration is dramatically different from the free trade debate that preceded it years before, according to Laxer:

Unlike those who were sympathetic to the United States or pro-American in past historical periods, the continentalists of today accept Canada’s existence only as an establish fact, not as a matter of conviction…

American capitalists are American to the core… Canadian capitalists could not be more different…

George Grant depicted the Canadian predicament perfectly. “No small country can depend for its existence on the loyalty of its capitalists,” he wrote. “International interests may require the sacrifice of the lesser loyalty of patriotism.  Only in dominant nations is the loyalty of capitalists ensured.  In such situations, their interests are tied to the strength and vigour of their empire.”

Is Unrequited Love Still Real Love?

There are trade reasons for avoiding deep integration with a trade partner that does not fully appreciate the role the other party plays in trade.

Many industries, including automotive manufacturers, are deeply integrated between Canada and the U.S. using a just-in-time delivery system. If halting assembly processes for labor violations would result in trouble for American plants and workers as suggested by some American commentators, it would only create more trouble for security issues.

The U.S. is also highly dependent on Canada for many resources, especially energy.  The Senate report stated,

…Canada plays a key role as a supplier of oil, natural gas and hydroelectricity to the American market. Indeed, Canada is the United States’ largest supplier of energy, exporting more crude and refined oil products to the U.S. than Saudi Arabia does, and shipping large quantities of hydroelectricity south of the border.^[7] … is this reality known south of the border?

The Enbridge Northern Gateway Project will extend a pipeline from the Alberta tar sands to the Pacific Coast in B.C., creating 4,000 construction jobs during a time when housing construction has slowed to a near-halt, and giving access to whole new markets.  Canada can choose to ship to the west coast of the U.S., or to what has been called the “fourth uninvited guest at the NAFTA party“  – China – and even the EU and Russia.

New markets are now easily accessible through the Northern Passage.  Choice is what is important, and what provides Canada a level of autonomy.

The conclusion of the 2003 Senate report was that the advantages of those advocating for deep integration were unsubstantiated,

…past steps to formally integrate the two economies have faced diminishing returns, and that the benefits of even closer formal integration do not appear to be substantial. Since Canada’s vulnerability is now being exposed on both the security and trade side, a prudent policy choice is to lessen our dependence on the U.S. market and to diversify our trade. That does not mean that we should neglect trade relations with our most important economic partner; it just implies that we should not continue to “put all our eggs in one basket.”

Peace Through Trade

Despite rejecting GATT membership in 1979 and the “Lost Decade”, Mexico joined GATT in 1986 and accelerated its trade liberalization, outpacing even Canada in the agreements its made with countries outside of NAFTA.  Mexico currently has free trade agreements with the EU, Japan and most countries in Latin America.

President Truman at the time of the International Trade Organization’s 1947 Havana Charter hoped that greater international trade would reduce protectionism leading to nationalism that could lead to armed conflict between nations.  Further trade with potential conflict areas often ignored by Canadian economists could help stabilize and normalize relations as well.

Contrary to what many commentator say about the impossibility of predicting the current financial crisis, the Conference Board of Canada did exactly that in a 2007 report, Mission Possible: Sustainable Prosperity for Canada.  Pointing to some of the apparent volatility and structural flaws of the American market and limitations of NAFTA, they suggested Canada develop trade ties with a wider array of countries, including China, India and Brazil.

Deep integration, and the Fortress North America advocated by the likes of Dobson and Granatstein, leaves us deeply vulnerable.  Looking outward means looking beyond just America.  And it’s not surprising that one of our other free trade partners, Chile, is also opposing the American black liquor tax credit.

A More Stable Canada Can Only Help America

The U.S. will remain our most important and valued trade partner, but not one that should dictate our foreign or domestic development policies adverse to our interests.  Canada doesn’t just need it’s own voice on the international scene, it needs it’s own vision, strategy, and approach to international trade.

Canadian protectionism against America is not the answer to trade shocks or tax credits that erode our manufacturing potential.

But broadening our perspectives and discovering new trade opportunities elsewhere to enhance the Canadian economy further, which could provide greater stability to ourselves and our closest neighbor, is something that will benefit us all.