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The U.S. Electorate's Message To Canada: Diversify Quickly

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On November 6, 2012, the citizens of the United States decided to maintain, essentially, the status quo: they re-elected Barack Obama as President, left the United States House of Representatives solidly in Republican hands, and left the United States Senate under the control of the Democratic Party. But as with all U.S. elections, there are implications for Canada, which, for better or worse, is usually pulled by the tides of American regulation and economic prosperity - or the lack thereof.

Of critical concern for many Canadians is how the new administration will deal with the issues of energy, the environment, and economic co-operation. This past week, the Fraser Institute published a series of essays by academics from across North America that examines the implications of U.S. policy in these areas for Canada. The general conclusion was that a second-term Obama administration is likely to continue on a protectionist trajectory, and to cement its role as an economic competitor of Canada's, rather than its historically overwhelming role as a reliable trading partner.

When it comes to energy and natural resources, the rhetoric of the first Obama administration is quite disjointed from the actual record with regard to fossil fuel production in the United States. Seen from an empirical perspective, the reality of U.S. energy production has been that despite the anti-fossil fuel rhetoric, production of oil and natural gas on state- and privately-owned land in the United States has increased dramatically, and that trend is likely to continue.

While the first Obama administration managed to slow exploration and production on federally-controlled lands, that slowdown was swamped by the natural gas and oil boom occurring on state and private lands. And the economic benefits have been one of the only bright spots in the U.S. economy. Even the U.S. Environmental Protection Agency (EPA) is unlikely to kill hydraulic-fracturing, the goose that is laying so many golden-eggs.

Turning to the environment, Christopher Horner of the U.S. think tank Competitive Enterprise Institute, points out that the key threat to Canada comes from its history of co-operating with the U.S. on pollution controls. Horner observes that "Canada has long held a policy of harmonizing environmental regulations with those of the United States, at least the major ones such as National Ambient Air Quality standards. Part of this is due to the North American Free Trade Agreement which urges harmonization of rules as they tighten, but not if they loosen. If the U.S. is particularly aggressive in tightening such environmental standards at high cost, Canadians could soon see their own economy affected through the harmonization process."

Horner also points out that the EPA, which was somewhat stifled in President Obama's first term, is poised to dive over a "regulatory cliff" of delayed regulation that could dramatically impact U.S. economic growth. Horner observes that the fight over the Keystone XL pipeline is emblematic of the change in U.S. posture from an automatic assumption of partnership, to one of competition.

Finally, Simon Fraser University Professor Alexander Moens concludes that the United States is going to shift from being Canada's most reliable, and largest trading partner to a global rival; diversification of export markets needs to be Canada's focus in coming years, as it has in the recent past. Professor Moens observes that "...the United States will not be willing to deal with Canada on trade and investment in a strategic manner until it needs cooperation with Canada...because of its own relative weakness vis-à-vis the rest of the world, and that will still be another decade or so."

Moens concludes that for Canadians, the message of the 2012 U.S. Presidential election is "The next phase of Canada's economic development will likely take place in a political constellation of several world powers. Canada's well-being will depend on a combination of competitive market factors at home and specific deals with multiple trade partners abroad among which the United States will likely still be the largest."