Canada's steady growth is a plus for U.S.-Canadian trade and investment - U.S.-Canada Free Trade Talks Begin - includes announcement of U.S.-Canada trade conference in New York

Business America, Nov 10, 1986

Canada's Steady Growth Is a Plus for U.S.-Canadian Trade and Investment

The robust economic growth achieved by Canada in 1984 (5.3 percent) and 1985 (4 percent) is not expected to be repeated in 1986 and 1987. Real gross domestic product, Statistics Canada's new measure of aggregate economic activity, is expected to grow 3 percent this year and slightly less in 1987.

Employment and investment are weak areas in the Canadian economy. Employment gains have slowed steadily over the past year and, given the overall economic performance forecast for 1987-88, only modest reduction in the unemployment rate can reasonably be expected, i.e., 9.7 percent this year, 9.5 percent in 1987, and 9.4 percent in 1988. The weak employment outlook, with its obviously adverse consequences for household incomes and business spending, arises in part from the pressures faced by three important sectors of the economy: energy, agriculture, and international trade. Investment spending is suffering this year from the sharp downturn in energy prices and a more broadly based decline in nonresidential construction. Prospects for energy sector investment remain bleak, and a rebound in nonresidential construction awaits stronger export orders and greater domestic demand for producer goods.

The government's ability to stimulate the economy and create jobs is limited by the country's serious fiscal situation. Canada's federal deficit, as a share of GNP, is even larger than that of the United States, and Finance Minister Wilson remains firmly committed to a medium-term strategy that reduces the federal deficit at a fairly rapid rate. The growth of discretionary federal expenditures has been reduced dramatically, while revenues have risen strongly due to tax increases or surcharges. Unfortunately, the oil price decline caused a sharp reduction in federal (and provincial) energy tax revenue, exacerbating the deficit problem and prompting the Finance Minister to boost his estimate of the FY86-87 federal deficit by C$2.5 billion to C$32 billion.

The U.S.-Canada free trade negotiations are the most important single trade issue for the Canadian government. Preliminary discussions began in April 1986, with actual negotiations expected to run through the end of 1987. While there is opposition, both within Canada and the United States, to bilateral freer trade, the Mulroney government remains committed to concluding as broad an agreement as possible. Studies indicate that freer trade would contribute materially to faster Canadian macroeconomic growth. Canada is also a strong supporter of the new GATT round of multilateral trade negotiations.

National Business Prospects

With the reduced but steady rate of economic growth expected for the Canadian economy as a whole through 1988, the prospects for trade and investment between the United States and Canada remain very good. Lower interest rates and inflation are stimulating consumer expenditures on durable goods and housing, and the investment climate exclusive of the energy sector has improved due to favorable economic and political developments.

According to U.S. export data for the first six months of 1986, U.S. exports to Canada totaled US$22.9 billion, down 7.4 percent from the US$24.7 billion in the same period of 1985. The decline was broad-based, but particularly noticeable for motor vehicle chassis and parts, office machinery parts, and coal and mechanical shovels (perhaps related mining equipment). On the other hand, the value of some leading export items such as passenger cars and trucks rose significantly.

Canadian trade data for the first six months of 1986, however, show an increase in Canadian imports from the United States of 6.3 percent to C$40.1 billion. (The differences in data reflect primarily under-reporting of U.S. exports to Canada.) According to Canadian data, imports from the United States increased mostly to Ontario and declined mostly in the Prairie Provinces.

While the data on investment trends also are sometimes difficult to interpret, it does appear that the more positive investment climate in Canada--in part due to the replacement of the Foreign Investment Review Agency (FIRA) by Investment Canada--is resulting in increased U.S. investment flows to Canada. According to the balance-of-payments data, U.S. direct investment net inflows to Canada in the first six months of 1986 were C$943 million, as contrasted with net outflows of C$404 million during the same period of 1985. Likewise, data received from Investment Canada on establishment of new businesses and acquisitions by U.S. firms show a more than 20 percent increase in activity (mostly in acquisitions that were previously reviewable by FIRA) for the period September 1985-August 1986 relative to the preceding 12 months.

The industrial sectors in Canada which present the best prospects for expanding U.S. exports include computers and peripherals, auto parts and accessories, building products, aircraft and parts, telecommunications equipment, plastic materials and resins, construction machinery and parts, analytical and scientific instruments, and industrial process controls. In most of these sectors, there will be higher than average growth, which should spur imports from the United States despite already-high U.S. market shares and vigorous competition from Canadian and other foreign suppliers. The depreciation of the U.S. dollar vis-a-vis other key currencies such as the Japanese yen and German mark should help improve U.S. price competitiveness in this respect.