Few Canadians are aware of the significant drop in bilateral trade and investment flows with the United States over the past five years, relative to Canada's trade and investment flows with the rest of the world -- except perhaps those Canadians in the manufacturing sector who are feeling an acute pain from both a softening of the U.S. economy and a rapid rise in the value of the Canadian dollar relative to its U.S. counterpart.
We should rejoice in the rapid expansion of our trade and investment relationships with the rest of the world, especially at a time when this trend protects us against the colder economic winds from the U.S. But it would be wrong to interpret this swing as a signal that it is now less important to work hard at our relationship with the United States, a country that remains by far Canada's most important export marketplace.
Trading more effectively with the U.S. is not an either-or proposition in terms of our trade with other countries, except in a narrow statistical sense. When the American share of Canada's trade or foreign direct investment activity drops -- as it has done since 2001 for exports and imports, and for inbound and outbound direct investment -- the share with other countries rises.
In the past we have had large upswings in the share of our trade with the U.S. that have strengthened our domestic economy and the global competitiveness of Canadian manufacturing businesses -- as the Auto Pact did in the 1960s, and as the free trade agreement and NAFTA did in the 1980s and 1990s. Canada now sells more manufacturing goods to the rest of the world than ever before.
Conversely, with Canadian primary products now commanding a strong price on international markets, we have the opportunity to use these revenues to build a more competitive industrial and services infrastructure. We have squandered similar opportunities in the past, as with the national energy program of 1980.
Thus, the ups and downs in the share of our international trade and investment with the rest of the world should not be construed in terms of economic "independence" or "dependence" vis-à-vis the United States. The question is: What do we make of the opportunities that arise to strengthen our global competitiveness? In this context, Canada's economic relationship with the United States deeply affects our success in other markets, particularly in manufacturing. This is because manufacturing production in Canada has become increasingly dependent on fluid border crossings between Canada, the United States and Mexico, due to increased specialization in parts and other intermediate manufactured products between the three countries.
Disruptions in land border crossings bring significant difficulty for Canadians involved in the production of manufactured goods, let alone having to find an alternative to the U.S. as an outlet for that production.
The highly integrated production apparatus is continuously threatened by schemes to address border security concerns between the U.S. and its two North American neighbours. While security considerations are paramount, there needs to be an overarching examination of how they can be addressed without harming the economic side of the relationship and the temporary movement of the people that often underpin it.
Furthermore, while other regions of the world have made significant progress in liberalizing trade, investment and the temporary movement of skilled people since the three North American countries signed NAFTA in 1992, the North American leadership on this question has been falling behind global trends. Notwithstanding the laundry list of measures aimed at facilitating freer and more secure flows of goods and people across North American borders contained in the Security and Prosperity Partnership (SPP) -- which was struck in 2005 between the three countries -- so far there has been a greater proclivity to hang separately than to hang together in the face of both rising global competition and opportunities.
Canadian policy-makers responded intelligently and creatively to the security concerns at the border following 9/11 by providing most of the work behind the Smart Border declaration, and have pushed many initiatives since then to keep the Canada-U.S. border both secure and open. It has now become necessary for us to propose to our partners that we move forward toward a "Smart North American Economy."
Criticisms of the SPP that suggest it is a bureaucratic exercise captured by special interests and falling below the radar screen of legislators, show that we are in need of an institutional body, perhaps a commission, to advance the Smart North American Economy - one that answers clearly and transparently to elected representatives, but that is also charged to autonomously and robustly move the process of modernizing the North American economic relationship to bring it on competitive par with others in the world. This body would certainly look at harmonization of certain rules and practices among the three countries where the benefits in terms of reduced transaction costs and the costs in terms of lost policy autonomy are low. But mainly, it would be charged by North American governments with making recommendations to the relevant agencies in the three countries, toward ensuring economic relations in North America that are as open, fair and secure as possible despite the legal, regulatory and other differences, also bearing in mind the need to deal often with Canada-U.S. issues and Mexican-U.S. issues on different tracks.
Learning from the experience of the Canada-United States International Joint Commission, that was set up under the 1909 Boundary Waters Treaty, such a body would give authoritative advice to governments and their agencies on critical issues such as lumber that require a mixture of public input, technical advice, and an ability to transcend different policy realms, such as trade and the environment.
Canada can and should lead in establishing such a framework, intelligently using our existing room for manoeuvre to advance our national interests within North America.