Canada’s trade vision shifts beyond the United States

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barrie mckenna
OTTAWA— From Monday's Globe and Mail
Published Sunday, Nov. 13, 2011 9:18PM EST
Last updated Monday, Nov. 14, 2011 8:01AM EST

Ottawa has thrust trade with Asia to the top of its economic agenda after the Obama administration imposed a potentially fatal delay on a multibillion-dollar oil pipeline between the two countries.

Prime Minister Stephen Harper, who met with Barack Obama at the summit of Pacific-rim leaders in the U.S. President’s native state of Hawaii on Sunday, told reporters that last week’s surprise decision on the Keystone XL project proves Canada needs to diversify its trade ties.

“This does underscore the necessity of Canada making sure that we’re able to access Asian markets for our energy products, and that will be an important priority of this government going forward,” he said before a discussion with Mr. Obama at the Asia-Pacific Economic Co-operation summit in Honolulu.

The broader dilemma for Canada is that its economy is caught between a close neighbour that doesn’t always share its priorities, and distant customers in Asia who want its natural resources but can’t easily get them.

In a powerful indication of Ottawa’s eagerness to strengthen Pacific links, Mr. Harper disclosed that Canada now wants in on APEC’s Trans-Pacific Partnership (TPP) free-trade talks, which would link countries around the Pacific rim, including the United States, Japan, Australia, New Zealand, Chile and Vietnam.

“We’re expressing formally our willingness to join the Trans-Pacific Partnership,” Mr. Harper said. “It is something that we’re interested in moving forward on.”

Until now, key participants in the TPP had shunned Canada because of its reluctance to put the highly protected dairy and poultry industries on the table. But on Sunday Canada and Mexico indicated their willingness to join the talks – handing Mr. Obama a chance to pronounce the APEC summit a success.

Strains in the Canada-U.S. relationship and efforts to mend fences were at the top of the agenda as Mr. Harper and Mr. Obama met. They talked about a pending Canada-U.S. trade and security pact as well as the consequences of the State Department’s decision to put off until 2013 approval of the $7-billion Keystone KL pipeline that would carry oil sands crude to refineries in Texas.

Mr. Harper played down that and other setbacks, saying politics is temporarily clouding what’s best for the two economies. “This is simply the political season in the United States, and decisions are being made for domestic political reasons,” he told reporters.

There are other irritants in the U.S.-Canada relationship: the Obama administration’s decision to revive “Buy American” purchasing rules and a plan to raise more than $100-million from Canadian travellers with a $5.50 (U.S.) “passenger inspection fee.”

Canadian political and business leaders are now openly talking up the urgency of diversifying trade ties.

“Keystone may prove to be a tilting point,” said Colin Robertson, a former top Canadian diplomat and now a senior adviser with U.S. law firm McKenna Long & Aldridge LLP.

A generation of Canadian politicians has fretted about Canada’s heavy reliance on the U.S. market. What’s different now, according to Mr. Robertson, is that Canadian business leaders know they must look harder for opportunities abroad – particularly in fast-growing Asia.

“It’s forced a lot of reflection,” he said. “Chief executives are saying: ‘This is serious.’ ”

Top Harper government ministers also characterized the Keystone delay as a wake-up call.

Speaking from Honolulu, Finance Minister Jim Flaherty told CTV’s Question Period: “We’ve got to go where the trade is,” adding that Canada needs to work harder to “emphasize” its trading relationships with Asia.

Natural Resources Minister Joe Oliver similarly told CBC-TV that diversifying away from the United States, particularly in energy, is “right at the centre of our thinking. … It is a major, fundamental strategic objective for Canada.”

Just as the Obama administration’s pipeline decision has renewed a debate about opening new markets, it is also a powerful reminder of how tied Canada is to its southern neighbour.

Virtually 100 per cent of the oil and gas produced in Canada is destined for the United States via a massive installed infrastructure of roads, rails and pipelines. Overall, 75 per cent of Canadian merchandise exports went to the United States last year. Just 3.3 per cent was destined for fast-growing China.

“You can’t change geography,” Mr. Robertson acknowledged. “It’s still the biggest market in the world.”

Canada isn’t about to abandon the United States. The much-delayed Beyond Borders trade and security deal is expected to be unveiled before the end of the year.

“Negotiations are going very well, and we’re optimistic we’ll have a very strong program coming out, a very good announcement in the very near future,” Mr. Harper said Sunday.

Ottawa is also pushing hard to expand trade with Asia, highlighted by recent trips to the region by Mr. Oliver, Trade Minister Ed Fast and others.

Canada’s desire to cozy up to Asia still faces some tough realities.

One is infrastructure. Canada has expanded its West Coast ports to accommodate more trade in the region. But most of the country’s transportation links are designed for North-South trade. The proposed Northern Gateway pipeline, which would carry Alberta crude to Kitimat, B.C., is still years away and it’s likely to face the same environmental opposition as the Keystone pipeline.