The American footprint | Canada, 51st American economic state… without voting rights

Last week, the announcement of strong job creation in the United States had an immediate effect on the budgetary outlook of Canadian households.

On that day, the Bureau of Labor Statistics announced the creation of 254,000 jobs in the United States in September, far more than expected. This good news is likely to make the interest rate cuts that the Federal Reserve plans to revive the economy less necessary.

The market reacted strongly. The interest rate on 5-year US bonds – on which mortgage rates are based – rose 17 basis points to 3.96%.

And faced with this increase, the same rates in Canada jumped 13 points, to 3.12%.

In other words, because Liam found a job in Texas, Florence de Sorel may have to increase her mortgage budget during the renewal in the coming months.

This chain reaction shows how closely Canada depends on the United States for its economy. So much so that we could almost call Canada 51^e American state in economy… but without voting rights.

“Economic interdependence is greater than ever,” the chief economist of the National Bank, Stéfane Marion, told me.

This link is not only close for monetary policy. In recent years, the Canadian federal government has often increased its deficits to respond to American measures, deficits that Canadians will end up paying.

This was particularly the case in March 2023 when Chrystia Freeland announced the injection of $83 billion in various tax credits over 11 years in order to compete with the American policy for green energy, contained in theInflation Reduction Actnotably.

Other subsequent decisions, also related to green energy, will also have effects on our public finances. Thus, to compete with American aid, the federal, Ontario and Quebec governments have agreed to grant 35 billion by 2032 to Volkswagen, Stellantis-LGES and Northvolt to build battery and electric car factories in Canada.

That’s a lot of billions more than our expenses for a file…

The expenses column isn’t the only one that’s shaken up. Our tax levels also frequently undergo changes to suit the moods of Washington.

In the fall of 2018, for example, former Liberal Finance Minister Bill Morneau launched a series of tax measures in response to the Tax Cuts and Jobs Act by Donald Trump. For 2019 alone, the bill amounted to $5 billion for the federal government.

This American law reduced the American corporate tax rate from 35% to 21%, among others, compared to 26.5% in Canada (still at this level in Quebec).

“We are glued to the United States. Every time they move, our decision-makers look at the impact on our public policies, that’s for sure,” Lyne Latulippe, professor of taxation at the University of Sherbrooke, told me.

Our companies live this interrelationship on a day-to-day basis. Our exports to the United States represented $469 billion in 2022, or 71% of our total exports ($662 billion), according to the most reliable recent data from Statistics Canada¹.

About 12% of Canadian jobs and 17.8% of our GDP depend on exports to the United States (in Quebec, it’s 11.4% and 12.2%).

With imports, the impact on our economy is even greater (as seen in these maps). The United States also, for its part, depends on trade with Canada.

It is not for nothing that the business community is worried about Donald Trump’s desire to impose a general customs duty of 10% on American imports.

Three studies, all recent, demonstrate to what extent Canada would suffer.

According to Trevor Tombe, an economist at the University of Calgary, our exports to the United States would drop sharply. The decline would be more than 40 percentage points for the mining and energy sector, 22 percentage points for the automobile sector, 15 points for pharmaceutical products and 12 points for wood products.².

Concretely, this policy would ultimately result in a loss of $1,100 in income per person on both sides of the border.

In 1971, President Richard Nixon imposed such a 10% duty on imports. The impact was such that it was withdrawn after four months…

Desjardins Movement economists also fear major consequences for Canada in the event of a Republican sweep on November 5. There is talk of a fall in exports, a drop in the value of the loonie and a recession.

“Businesses and decision-makers would do well to hope for the best, but prepare for the worst,” conclude the authors of the study, aware that Canadian politicians have managed, in the past, to minimize the damage, thanks to the depth of our relations with the United States³.

For its part, the IFO Institute in Munich concludes that among the 123 countries analyzed, Canada and Mexico would be the two countries most affected by Trump’s tariff project, with a drop of 14% each in their world exports. , compared to 7% for China.

Painful, you say?

Besides trade, others are worried about the ever-increasing US debt. And this time, both Republicans and Democrats are responsible, although the debt risks increasing even more under the Republicans, with their tariffs and their desire to lower taxes, according to an analysis by the Committee for a Responsible Federal Budget, a group non-partisan American.

Stéfane Marion, of the National Bank, is convinced: “The budgetary indiscipline of the Americans, whether we like it or not, will affect us. It will have an effect on the interest rates of long-term bonds,” he says, hence the importance of cleaning up our own public finances to minimize the impacts.

Thierry Warin, professor of international affairs at HEC Montréal, is more nuanced. “Yes, there is a sharp increase in American debt, but this is also the case for all rich countries. And if the American debt increases, it becomes a global problem, not just a Canadian one. If things go badly in the United States, we’re all in trouble,” he says.

And moreover, he recalls that Donald Trump is unpredictable, and therefore that it is not clear that he will fully implement his economic threats (10% customs duty, end of the IRA, etc.).

All the same, Canadians have an interest in following this campaign closely, given its great economic importance on their wallets…

1. These are value-added exports, which essentially exclude imports of goods used in the manufacture of a good in Canada and then re-exported.

2. View the full study

3. View the full study

Concrete effects

The United States has considerable influence on our economy. Here are four examples of industries hit by American decisions.

Bombardier’s Waterloo

In April 2017, American Boeing’s complaint against Bombardier before the American Department of Commerce was fatal for Canadian control of the C Series. This complaint for allegedly dumping¹ in the United States with its aircraft was finally completely defeated in January 2018, but it weakened the marketing of the C Series aircraft and the already precarious financial position of the company. Due to this precariousness, Bombardier had to cede control of the C Series to the European Airbus in October 2017 and accept that part of the production would be carried out in Alabama rather than in Mirabel.

Trump’s aluminum tariffs

The aluminum and steel industries have sporadically been the target of Donald Trump’s desires, raising fears for their billions of dollars in exports to the United States. In March 2018, the then president announced the imposition of a 10% tariff on Canadian aluminum and 25% on steel for alleged national security reasons. The tariffs were imposed from June 2018, with a response from Canada on certain American products, then eliminated in May 2019. In August 2020, new threat of tariffs on these two industries, as the American elections approached. The threat was ultimately abandoned, for the most part.

The eternal conflict of 2 by 4

The lumber dispute – particularly 2 by 4 – has been present between the United States and Canada for 40 years. Five conflicts have dotted these years, with American producers accusing Canada of dumping or of having a subsidized industry, in particular because of the public ownership of 94% of the forests. Despite their setbacks before the WTO tribunal and the Canada-US free trade tribunal, the Americans persist. They thus deprive Canada of billions in revenue and American consumers of large volumes of wood, since the United States is not self-sufficient in wood. Anti-dumping and countervailing duties imposed on Canadians ranged between 8.4% and 20.2% between 2018 and 2024 and are expected to be 14.4% in 2025.

The oil pipelines of discord

Most of Canadian oil (86%) goes to the American market. At the end of the 2010s, TC Energy tried to further increase the volume of exports to the United States, with its Keystone XL oil pipeline project. The nearly 2,000 km pipeline was to transport 800,000 barrels per day from Alberta to refineries in New Mexico. But in 2021, the new American Democratic government, under Joe Biden, rejected it and the project was stillborn. On the other hand, Justin Trudeau’s government agreed to take over the Trans Mountain oil pipeline project to the Pacific coast (600,000 barrels per day), with the possibility of transporting Canadian oil by boat to Asia. The pipeline has been in operation since last May, but it cost the federal government $34 billion, seven times more than initially estimated.

1. Dumping is the action of selling a good in a foreign market at a lower price than that charged in the domestic market.