Obama visit puts Canada on the defensive

February 17, 2009

When President Barack Obama and Prime Minister Stephen Harper meet in Canada this Thursday, the growing economic crisis will be the main point of discussion.

And Harper could quickly find himself in a position he doesn’t like to be in: on the defensive.

Canada, as the smaller of the two trading partners, has become much more an exporter of raw and semi-processed resources in recent years — accounting for almost 60% of our exports — and it is deeply dependent on exports to the U.S.

The collapse of U.S. demand and of commodity prices is the main factor behind Canada registering in December a major drop in exports and its first trade deficit in 33 years.

Canadians should be grateful that Obama is taking bold fiscal steps to confront the most dangerous economic crisis since the 1930s. He is investing almost $800 billion over two years — equivalent to about 2.7% per year of U.S. GDP – in an attempt to prevent the recession from turning into another great depression.

Canada has a huge stake in seeing U.S. economic recovery policies succeed. It is essential to our own recovery.

However, it could become a political sore point with the Obama administration since Canada has not been nearly as proactive.

The Harper government’s proclaimed $40 billion fiscal stimulus package over two years is pretty feeble by comparison.

Subtract Harper’s planned spending cuts and infrastructure funding that is contingent on matched provincial and municipal dollars, and the Parliamentary Budget Office calculates that the Harper plan is even more tepid. The real net stimulus effect falls to a mere 0.7% of GDP — one quarter of the U.S. fiscal stimulus.

If I were the U.S. president, I would be concerned Canada is free riding on the coat tails of a U.S. recovery initiative without doing its part to prevent a prolonged global economic slump.

And I would be pressuring the Canadian Prime Minister to do more.

While dragging his feet on stimulus front, Harper appears content to throw darts at the Obama administration for its ‘buy America’ provisions attached to the use of public funds. These requirements will improve the effectiveness of Obama’s stimulus package in jumpstarting the U.S. domestic economy.

Since U.S. taxpayers are incurring additional debt to pay for these measures, it makes sense they would want their investments to create jobs at home. Canadians would wish the same.

As Harper should know, such domestic procurement policies have been in place in the U.S. for decades and they are legal under international trade agreements.

In the current circumstances, any alleged adverse consequences from minor departures from free market ideology (which by the way, got us into this mess in the first place), pale in comparison with the disastrous trade consequences of failing to revive the US economy.

The Canadian government should re-examine how it can better pull its weight by improving its own fiscal stimulus package. Instead of lecturing Obama on the theoretical virtues of free trade, the Harper government could implement its own ‘buy Canadian’ policy and create more jobs right here at home.

Given the highly integrated nature of sectors like steel and autos, both countries might even agree to mutual exemptions.

When Harper and Obama meet this week, the U.S. President will likely repeat assurances that his country will respect its international trade obligations. But he will not compromise on his number one priority: reviving the U.S. economy.

While Obama has some need to compromise with Republicans in Congress, there are no votes to be had from pandering to the republican inclinations of our prime minister.

On this and other issues, growing policy differences are likely to leave the Harper government at increasingly out of sync with the Obama administration.

Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives. www.policyalternatives.ca