With binational tensions unusually high, trends in key Midwest sectors are reminder of value of U.S.-Canada partnerships

Recent headlines have pointed to some of the strains (a mix of new tensions and a flare-up of longstanding conflicts) in the U.S.-Canada relationship. There have been proposed U.S. tariffs on steel, harsh words exchanged on Canadian dairy policy, and threats by President Donald Trump to end the North American Free Trade Agreement.
But dig a little deeper, and a much different story emerges — one of economic interdependence and cooperation in key areas such as energy and the environment.
“The relationship at the provincial-state level is probably as strong, if not stronger, than it has been since the mid-1980s,” says Carlo Dade, director of the Canada West Foundation’s Trade and Investment Centre, pointing, in particular, to the deeper relations built between state governors and provincial premiers.
Canada and the United States share much more than the largest binational border in the world; their peaceful relationship has contributed to economic growth in both countries as well as to the development of an intricate, integrated trading partnership.
“We are moving away from just being trading partners; now we are business associates that build things together and sell the finished products both domestically and around the world,” notes Christopher Sands, director of the Canadian Studies Program at the School of Advanced International Studies at Johns Hopkins University.
This thriving cross-border supply chain is one of several critical pieces of the U.S.-Canada relationship, and much of it is centered in the Midwest.

Canada is the largest purchaser of U.S. exports (goods and services combined) in the world; likewise, the United States is Canada’s largest trading partner. According to the U.S. Trade Representative, trade in goods and services between Canada and the United States totaled $674 billion in 2017, with U.S. exports to its northern neighbor exceeding imports.

Services, a sometimes overlooked part of the trading relationship, produced this $8 billion surplus for the United States. In Illinois alone, for example, $2.6 billion worth of business, professional, technical, financial and other services were exported to Canada last year.
On the goods side, several states in the Midwest have particularly close economic ties with their Canadian neighbors, thanks to this region being a hub of production activity related to the making of cars, industrial engines, plastics, food and energy products. Here are some trade statistics that underscore the point:
  • Canada is the biggest customer for exports from all 11 states in the Midwest (see map).
  • Illinois sells more to Canada than it does to China and Mexico combined.
  • For Michigan and Ohio, exports to Canada exceed those to the two states’ next seven largest trading partners.
  • In North Dakota, exports to Canada are greater than those to all other countries combined.
  • The United States accounts for a majority of the imports coming to the provinces of Alberta (66 percent), Manitoba (more than 75 percent), Ontario (55 percent) and Saskatchewan (85 percent).
  • The majority of these provinces’ exports go to the United States — Alberta, 87 percent; Manitoba, 65 percent; Ontario, 82 percent; and Saskatchewan, 85 percent.
There also is much more than this sheer volume of trade. The two countries are not simply moving finished goods (as, say, the United States often does with China); their businesses frequently make products together, thanks to the growth of cross-border supply chains in sectors ranging from manufacturing to agriculture.
Take the Midwest’s auto industry as one prime example. Each vehicle has about 40,000 parts, many of which cross the border a number of times before a vehicle is ready to drive off the assembly line.
According to a report commissioned by the Canadian government in 2016, U.S. content accounted for 8.5 percent ($70 billion) of the value of Canada’s manufacturing sector. Conversely, Canadian content in U.S.-manufactured goods accounted for $44 billion, or 2.5 percent of the value of U.S. exports.
Supply chains allow for companies to specialize in certain aspects of production. They often initially develop where they can get the supplies or natural resources they need, at a good price. Many companies keep low inventory on hand, which allows them to hold down costs. But, when a business needs components, it must be able to get to them quickly so production is not delayed.
This requires the United States and Canada to have a smooth-functioning border, with few delays and programs to expedite safe truckers and shipments, along with open trade policies.


NAFTA has helped integrate farm sectors
The U.S. agriculture sector may be responsible in an important way for saving NAFTA, at least for now. 
Last fall, a coalition of agriculture organizations and companies sent a letter to all 50 governors, warning that withdrawal from NAFTA would have a serious impact on the farm sector. Without the agreement, the countries (especially Mexico, which, unlike Canada, had no previous trade agreement with the United States) would return to a tariff system for agricultural products, including American pork, corn and soybeans.
This letter, and the report and data behind it, mobilized governors, members of U.S. Congress and state legislators to make their concerns known to President Trump and the U.S. Trade Representative. 
Jonathan Coppess, director of the Gardner Agriculture Policy Program at the University of Illinois, says “there has been an incredibly positive increase in [agricultural] trade under NAFTA.”
One reason why is how the free-trade deal enables specialized, integrated sectors (much like in manufacturing). In the livestock industry, for example, animals sometimes cross the border several times between birth and slaughter. Related industries, such as food processing, also are part of this integrated supply chain.
In addition, commodities are openly traded to meet the two countries’ needs for food or food-related products, and a number of Midwestern states are major producers of the tractors and other farm equipment used in NAFTA countries.
Still, as in other sectors and among other trading partners, conflicts are bound to arise.
“Localized concerns are due to the increase in agriculture trade,” Coppess says. This happened, for example, after some cow-calf operations faced problems, which helped lead to the imposition by the United States of mandatory country-of-origin labeling. The World Trade Organization ultimately struck those regulations down.
Then there is the current high-profile dispute involving the dairy industry. Overall, the U.S. dairy industry had a trade surplus with Canada in 2017. However, Canada imposes high tariffs on many dairy products once a quota is reached. And while NAFTA removed most tariffs and nontariff barriers, the current agreement did not address these policies in the dairy industry.
Electricity flows between two nations
Connection of the electricity systems in Canada and the U.S. is seen as a way of supplying more reliable, affordable power on both sides of the border. There currently are 37 cross-border connections allowing for electricity transmission between the two countries. Most of this energy goes from Canada to the United States, though there is a two-way flow of electricity. (When selling their power, provincial electricity generators look more to U.S. markets than to those in other provinces.)
Much of Canada’s electricity exports come from renewable sources of energy, such as Manitoba’s hydropower.
These interconnected electricity systems provide greater security to utilities, which can enter into long-term contracts assuring that they have enough power.
Long-term contracts account for about a quarter of electricity exports, while sales on the short-term, spot market to system operators (such as MISO, the Midcontinent Independent System Operator) to meet a more immediate need make up about three-quarters of exports, according to a report by Doug Vine, a senior energy fellow with the Center for Climate and Energy Solutions.
Demand for electricity peaks in Canada in the winter, while U.S. demand increases in the summer. This is one reason, Vine notes, that “connecting the two systems together provides a lot of efficiencies.”
The siting of transmission lines is often a difficult task, including when they must cross the border. Still, two major cross-border projects are progressing. The Great Northern Transmission Line is being constructed by Minnesota Power to bring hydropower from Manitoba, which is building a transmission line to connect with the Great Northern Line and also is upgrading several converter stations. Plans are to have the project up and running by 2020.
The proposed ITC Lake Erie Connector is a 73-mile-long underwater transmission line that will connect Ontario’s independent electricity operator to U.S. independent service operator (PJM), which covers much of the mid-eastern United States (including several states in the Midwest). Permitting for this project is well underway.
The two countries have a close energy partnership in other ways as well. Canada, for example, is by far the largest source of U.S. crude oil imports, providing 41 percent of the total in 2016, according to the U.S. Energy Information Administration. And in the Midwest, the rise in oil production in places such as North Dakota has greatly increased the amount of energy products moving between the two countries.



Statelline Midwest: June/July 20182.11 MB