Glen Hodgson
Toronto Star
July 22, 2010
 
The U.S. economy had little to celebrate this July 4. Most of the recent U.S. economic news has been mediocre or even outright bad. Private sector job creation has waned in recent months (although it is still on the positive side of the ledger), consumer confidence has sagged, home sales have slowed.

As America’s most important trade and investment partner, Canada cannot afford to have America continue to languish in a tepid or listless recovery. We can best help America to recover by being “un-Canadian” and selfishly looking after our own interests.

Canada’s selfish strategy starts with staying the course in terms of macroeconomic policy, which will ensure that our own economic growth continues on a sustainable path. The federal and provincial governments should complete the fiscal stimulus measures planned for this year, but not add any new fiscal stimulus. Our economy doesn’t need it, and more stimulus spending would only mean higher debt loads down the road.

The next phase will be to restore balanced budgets within a realistic time frame, already announced in most jurisdictions. This medium-term fiscal action will help to get the added debt under control, relieving pressure on capital markets and on longer-term interest rates.

Staying the macroeconomic course also means the Bank of Canada should gradually recreate more normal monetary conditions here by increasing short-term interest rates without stalling the recovery, guided by global and North American conditions.

But Canada could do more that would be good for the neighbourhood. As we have argued on numerous occasions, Canada needs to treat productivity growth and innovation as higher national priorities if we are to adjust to a strong dollar and to the aging of our workforce.

Stronger Canadian productivity growth would also be good for the U.S. It would produce higher incomes in Canada and stronger demand for imports from the rest of the world. The U.S. is the top exporter to Canada, so it would have a chance to win its fair share of a growing Canadian market for imported goods and services.

The third element of a selfish strategy is to re-energize the North American trade policy agenda — forcing firms in the U.S and Canada to be more internationally competitive. Canada-U.S. trade has languished for a decade; the U.S. share of Canada’s total exports has fallen from a high of 87 per cent to below 70 per cent. Something new is needed to kick-start trade growth between our two countries. If Canadian firms are going to be able to meet and beat the increased international competition from China and the other emerging economies, improved access to the U.S. market will be an important condition.

South of the border, the U.S. economy and consumers are now going through a challenging transition period of deleveraging — relying less on access to credit for consumption, and saving more of every paycheque. Growth in domestic demand will be weaker in the future than during the 2000s, so American firms are going to have to rely more on exports to markets like Canada if they are to sustain their revenues.

Therefore, the conditions are ripe for a renewal of the Canada-U.S. free trade agenda, specifically by taking on the myriad (and often subtle) regulatory barriers that impede trade between our two economies — like slightly different specifications for autos sold in each market. Both countries were helped by adjustments to the “Buy American” legislation that removed the legislative barriers for Canadian exporters, while giving U.S. firms access to the Canadian market for provincial procurement. The logic of reducing regulatory barriers to trade between Canada and the U.S. now needs to be extended across the entire economy.

There are occasions when helping yourself is the best way to help your neighbour. Now is one of those times. Canada should selfishly pursue an economic agenda that advances its own interests, and the U.S. can enjoy the fringe benefits.

Glen Hodgson is Senior V.P. and Chief Economist of the Conference Board of Canada