Canada represents a fraction of the world's economy and even a smaller share when we consider the relative size of its equity and foreign exchange markets against the world basket. For that reason, domestic events garner very little attention abroad or as one global fund manager once remarked to me during a visit to his London office -- "I might spend half an hour a week at best reading about what is going on in your neck of the woods."
The even sadder reality is that there are probably more Canadians who watch the far more entertaining antics south of the border than Americans who tune into Canadian politics and our federal election races. The upcoming U.S. Presidential election in November is already becoming regular water cooler content for Canadians starved for the return of hockey season, even though the outcome may not necessarily change the direction for Canada's economy, for better or worse.
On the plus side, there are a number of issues that will likely remain constant regardless of whether the Democrats or Republicans take office. For one, both parties accept and understand the importance of Canada-U.S. trade going forward. As of July, total monthly trade between the two countries had recovered back to about $55 billion -- close to the level back in December and only a couple of billion off the peak seen in 2008.
Contrast that to the value of trade between the U.S. and China, which is currently around US$44-billion per month. While trade, as a share of the economy, may be less important to the U.S. than Canada, it is nonetheless significant in the absolute sense for U.S. jobs. Furthermore, Canada remains a key source for U.S. oil imports and this will become more important in the future as global supplies tighten. Shared goals are also present on the financial side.
In the wake of the credit crisis, recession and, consequently government-led recovery strategies, both countries face the need to reduce fiscal imbalances. Yes, this problem is more acute for the U.S., but the policies that emerge post-election will have to address reducing deficits and stabilizing debt regardless of which party gets in, unless there is a complete loss of sanity in Washington (more on that later).
Canada's capital markets are also among the most resilient and well-managed in the world, which offers U.S. companies a sound alternative or supplement to domestic capital raising initiatives. In terms of less observable positives for the U.S. administration these would include Canada's inroads into Chinese export markets and its status as U.S. ally on piracy and intellectual property; while Canada also has a common objective in terms of northern territorial sovereignty (important for access to resources).
There are, however, some challenges which could emerge for Canada regardless of who takes the victory flag in November. Given the focus on how unsatisfactory U.S. jobs growth has been during this recovery, it is conceivable that both parties could adopt a slightly more protectionist stance on trade towards all countries, including Canada. The extension of this would be a motivation for U.S. companies to concentrate efforts at home for increasing local payrolls and domestic investment of capital.
We have already heard of anecdotal cases where U.S. firms have reduced staffing in Canada; which can have a disproportionate effect on local communities than what is picked up in the national statistics. Note, Canada has been active in trying to diversify its trade concentration away from the U.S. to places like China, Latin America and Europe. In a scenario where it's every country for itself, the U.S. could respond to that competitive gesture either through reduced attention on Canada or increased focus on those new centres Canada is trying to penetrate.
As for energy, there is also a flip-side to the otherwise positive argument for continued cooperation between Canada and the U.S. and that has to do with the increased production of natural gas coming out of the U.S. Both Democrats and Republicans are keen to maintain the momentum in shale gas exploration and extraction, which will eat into some of the demand for Canadian-based product. Until Canada truly ramps up its LNG infrastructure with an eye to higher non-U.S. exports, this is a potential risk.
The final challenge relates to the Washington sanity issue -- in other words, the risk that neither party (Oval office or Congress) is willing or able to wrestle the fiscal deficit to the ground, thus triggering another global market panic. This would impact Canada's equity and bonds markets but, unlike the response witnessed after the summer 2011 debt ceiling panic, the U.S. dollar might not be viewed as a safe haven this time and subsequently fall against the major currencies, including the Loonie. Where Canada is already feeling the pressure of a high valued currency, further appreciation could trigger a recession if bad enough.
All of this is not to say that the November vote has zero relevance for Canada. There are after all differences between the parties on key issues which might appear marginal, but nonetheless can turn out to be important for Canada. In the case of a Democrat victory, the probability of increased protectionism would typically be considered higher, especially with respect to bolstering employment growth in the U.S.
True, Obama would be done after this term anyway and Romney will certainly love to get a second term in office from achieving economic success; but I suspect the pressure is higher on the Democrats to prove themselves economically so the baton can be passed effortlessly to their next Presidential candidate.
Surely, Obama owes that to Hillary for the fine job her husband did at the convention. At the same time a Democrat win will ensure that financial regulations south of the border remain tight or tighter. Forgetting the criticism this may draw from some circles, for a country like Canada where regulations are already fairly tough relative to the world, this means maintaining at least a more level playing field.
In the event of a Republican victory, this regulations spin could be turn on its head and Canadian financial institutions might face tougher competition for capital should regulations below the 49th parallel get relaxed. The offset would be perhaps a friendlier stance towards the Canada-U.S. energy partnership (TRAP watchers are keen to see the stalled Keystone XL pipeline back in gear). A less visible positive for Canada from a Republican administration might be the advantage it could gain in attracting Latino immigrants given the more restrictive policy agenda of that party relative to the Democrats.
Still, the similarities of both parties, both positive and negative for Canada, suggest that the attention to the election will be more for entertainment reasons on a night we don't want to watch the Flames, Habs or Senators.