What happens to Canada if the US gets into real economic trouble?

Last night president Obama made a deal with the GOP to make the Bush tax cuts permanent.  Sure the extension is for two years, but the employment situation in American will not improve (estimates are for unemployment rates to drop by 0.3% and 0.6% they are at 9.8% now) and the likelihood that Obama will win a second mandate (there could even be a challenger for his job) appear much lower.  Democrats feel betrayed (he ran on a platform of no extensions), and independents now realize that the GOP has the real power so may as well give them the whole thing after all!

Republicans are very bad at cutting spending, Social Security, Medicare and Defense are off the table for the GOP (in view of their supporter’s demographics and philosophy), problem is that with interest expenses these four items account for 77% of the U.S. government total budget.  Moreover, healthcare costs are rising at more than 4 times the rate of inflation.  Renewing the "Bush" tax cuts (rechristen "the tax cuts" since they are also Obama's now) sends the Federal deficit the 10% of GDP threshold, the same as Greece.

 

Now America is not Greece, but eventually the reality of massive deficit will hamper America’s ability in financing its deficit.  My guess is that Canada has about a decade before things come to a head.  Canada has been warned – America will not take any strategic decision unless its back is against the wall. 

Should Canada economic policy encourage exporters to diversify export destination away from America? 

There are a number of step that the Canadian government can take, most will actually generate savings:

(1)               Instruct Canada’s Export development Corporation that it should apply more stringent solvency tests when dealing with American Importers.

(2)               Facilitate the growth of trade with Asia (which is already occurring).

(3)               Provide “translation” grants so that Canadian corporations can offset some of the foreign language translation costs.

(4)               Improve the scope of Canada’s trade missions in Asia 

(5)               Promote the construction of an additional pipeline to the West Coast to support the export of Oil and gas products to other markets (instead of building an additional pipeline to the US).

Language barriers are a key issue for Canadian corporation dealing with non-North American consumer.  Moreover, the focus of these efforts can be limited to manufactured goods, since raw material and energy are fungible.

Thankfully, America’s elected officials are almost certain to help in this process.  Anti trade legislation is making its way through congress, with broad support from both parties – who have different constituencies but similar agendas.

Canada has a decade to reduce its dependency on the American market, already over the past 15 years the importance of America as our trading partners has grown for 2/3 of all exports to ¾.