Time for Canada To Find New Trading Partners

Posted by Jeff Rubin on August 17th, 2011 under SmallerWorld • 5 Comments

Ever since the North American Free Trade Agreement was implemented in 1994, Canada’s economic compass has been pointing south.

But with U.S. oil prices more than $20 below world levels, an American auto market nearly 50% cent smaller, and a broke and dysfunctional Washington that is dependent on the People’s Bank of China for funding, maybe it is time for Canada to think about reorienting its economic compass.

Prime Minster Stephen Harper’s recent trade sortie to Brazil is a step in the right direction but with over 80% of Canada’s merchandise trade still bound for the U.S., Ottawa has its work cut out for it. Shipments to the U.S. are roughly a third of the Canadian economy.

In yesterday’s world of U.S. driven global growth, that trade linkage was the best thing Canada had going for it. But today, that kind of trade exposure to a stagnating, and the debt-ridden U.S. economy is quickly becoming Canada’s biggest liability.

Moving your business away from the U.S. market is now one of the most popular discussions in Canadian corporate boardrooms.

Some industries can reposition themselves better than others. The auto plants operated by Ford, Chrysler and General Motors in Ontario are basically trapped into serving a shrinking U.S. vehicle market (roughly 11.5 million unit sales versus a pre-recession high of more than 17 million vehicles). Fortunately, the motor vehicle industry in Canada, as in the U.S., is less important than it once was. While Canadian trade used to be dominated by the export of autos and parts to the U.S., it is dominated today by exporting what those cars run on: oil.

Oil now accounts for almost half of Canada’s export earnings, and the Canadian dollar, already trading at a premium to the greenback, is behaving more like a petro currency every day. This has made getting full value for energy exports never more important.

Yet you would have to go back to the early 1980s made-in-Canada oil prices during the controversial National Energy Program to see as big a gap between world oil prices and what Canadian oil producers are getting paid for their oil today.

The spread between Brent-based world oil prices and West Texas Intermediate, the land locked American prices based in Cushing, Oklahoma, is over $22 per barrel, and it seems to be getting bigger with every passing month.

That is a huge price to pay, not only for major Canadian oil producers such as Suncor but the Alberta Treasury’s royalty revenue. One of these days, the oil sand producers and their pipeline partners are going to wake up to the fact they are sending their fuel to the wrong market.

It is time Canada started looking for new export markets. And it might want to begin that process with its most important export of all: oil.

  • Jim-in-MN

    You should read the fine print of NAFTA

  • JB


    Do you really long for a US tank to park on your driveway?


  • Jhmcspadden

    It is about time someone started talking about this issue.  Isn’t eastern Canada importing a significant amount of oil at significantly higher prices than western Canada is receiving in US markets?

  • Nik

    Unfortunately due to the apathy of Canadians – we have not only adopted their culture but let their corporate interests dictate our trade policy. NAFTA was the biggest sell-out in Canadian history and we got Wal-Mart in return.

  • Unc

    Jeff, I for one am in total agreement with you , our cousins down yonder are quite happy with our land-locked crude, in fact , a pipeline to the west coast-Gateway- at this point in time is a tough sell. Proponents of this option must be more innovative. The first priority should be a multi redundantcey pipeline plan that covers concerns over sensitive areas.The days of building a single wall crude oil pipe line through sensitive areas is over.Other things can be incorporated to minimize spillage such as shut down valves spaced out in short increments in super sensitive areas. As far as tankers comming into the douglas channel to kitimat, the proposed plan in place is fairley decent, but like any thing,could use some tuning. Why not take a premium of the different prices and apply it to building a world class pipeline system to the west coast .Involve first nations people and the people of Canada, so they feel confident that the system is safe and do – able. In my mind, aint Squat gonna happen till this is accomplished and it is gonna cost some extra bucks. Me thinks it would be worth it, but do not expect the yanks to be big on it.Unc fsj bc canada.