More than just neighbors: Trade between Midwest’s states and provinces is a powerful economic engine

Stateline Midwest ~ Issue Brief

The U.S. and Canadian economies are closely intertwined, but barriers to optimal trade remain an issue. States and provinces can and should have a role in helping remove these barriers.

The diagram below, which illustrates the sources of parts for one small component of a sport utility vehicle, provides a good example of the integrated economic relationship between the U.S. and Canada. 
Ontario provides one part of the car, states such as Michigan and Ohio provide another. And back and forth the car goes until it becomes a finished product.

“We are less and less trading partners, and more and more business associates,” says Christopher Sands, a Canada scholar and senior fellow at the Hudson Institute.

The two nations’ businesses build things together, Sands says, selling the finished products domestically and around the world.

Colin Robertson says that products stamped with the “Made in Canada” label are a good example of the integrated nature of cross-border manufacturing.

“Forty percent [of these products] contain U.S.-made content, an indication of the fact that we do more than trade across borders — we make things together,” says Robertson, vice president of the Canadian Defence and Foreign Affairs Institute and a former Canadian diplomat.

In other parts of the region, oil or beef cattle play a bigger economic role than manufactured goods, but in every way, the Canadian and American economies are closely linked.

The U.S.-Canada partnership is the largest trading relationship in the world. In 2011, bilateral trade reached $689 billion, with $1.9 billion in goods and services crossing the border each day. Trade with

Canada is critically important for the states in the Midwest — it is the largest trading partner for every state in the region. More than 11 million jobs —8 million in the U.S. — depend upon this bilateral trade relationship.

Last year, the 11-state Midwest’s exports to Alberta, Manitoba, Ontario and Saskatchewan totaled $82 billion (Canadian dollars), while imports totaled $120 billion. Most states in the region had positive trade balances with the provinces.

Nationally, for every dollar that the U.S. spends on Canadian products, Canadians spend 78 cents on U.S. products. Sands calls this “a reasonably profitable, mutually beneficial relationship, especially as compared with the 50 cents Europeans spend and 20 cents Chinese spend for each dollar they sell to the U.S.”

Often, too, this trade is circular. Alberta is a major source of oil for the Midwest, where Canadian crude oil is refined. Yet some of the oil goes back to Alberta in the form of refined oil products such as engine additives. Cattle and other animals also are moved across the border, sometimes several times, during their lifetimes.

By the time a car is finished being manufactured, the various parts may have each crossed the border seven times, according to Kim Hill at the Center for Automotive Research. In fact, cross-border supply chains are in place throughout the manufacturing process. More than 40 percent of daily trade between Canada and the U.S. occurs within the manufacturing sector.

Recent efforts to include “Buy American” provisions in proposed federal legislation (and successfully included in the American Recovery and Reinvestment Act) are a challenge to these supply chains.

For example, some U.S. companies wanting to sell pipe for use in Recovery Act-funded water and sewer projects had to forgo long-time, reliable and less expensive parts suppliers in Canada in order to meet this provision.

U.S. companies can be hurt by Buy American provisions as much as they can be helped. For example, when Canadian firms were excluded from bidding on Recovery Act-supported projects, U.S. suppliers that had long-standing relationships with these firms lost business as well.

The new bridge scheduled to be built between Detroit and Windsor has a “Buy North American” content rule, which could be a new standard for future public works projects.


The role of Midwest’s states and provinces

State and provincial governments have a direct role to play in infrastructure — building and maintaining the roads, bridges, pipelines and airports that move products between the two countries and help get these goods to market.

“Because of the way we produce things, we are highly dependent on infrastructure,” Sands says.
The actions of state and provincial governments, too, can influence and encourage cross-border travel and tourism.

Cross-border travel declined after new passport requirements were instituted in the United States following the September 11, 2001, terrorist attacks. In response, some border states and provinces now offer enhanced driver’s licenses, a low-cost alternative to a passport that can be used at land borders. 

These new travel documents can complement the cooperative tourism-promotion initiatives of state and provincial governments, or local governments.

States and provinces should also be part of ongoing efforts to create a more seamless regulatory system between the two countries. Some business regulations — certain trucking rules are one example — are set by the states and provinces. 

The U.S. and Canadian federal governments are currently in negotiations over improving regulatory cooperation, and state and provincial leaders should have a seat at the table.