The decline of the US market

Given the less-than-rosy future facing our neighbours to the south, Canadian exporters should look to diversify their trading partners.

Many Canadian companies are banking on the timid recovery in the US to kick-start their exports. However, given the less-than-rosy future facing our neighbours south of the border, they should instead consider attracting clients in other countries.

I say "timid" because the US economy is still far from regaining the growth rate it enjoyed in the years preceding the 2008 financial crisis. Seeing that American household debt is still high, it’s not surprising that the Federal Reserve is keeping interest rates very low.

Our exporters should be especially concerned about medium-term budget issues since Canadian businesses, and the country’s economy as a whole, depend on government contracts with the United States.

Heading toward a fiscal cliff

The US is carrying a staggering debt load of more than US$17.5 trillion, which increases each time the country raises its debt ceiling — a pseudo-psychodrama that unfolds year after year between Democrats and Republicans. It’s startling to think that the US has raised the debt ceiling 80 times since the 1950s. It makes you wonder why a debt ceiling exists in the first place.

The financial crisis was certainly painful. But these deficits are mostly the result of a long-term trend that will worsen over time. Since the early 1990s, spending (including mandatory spending on social programs for seniors and the poor such as Medicare, Medicaid and social security) has increased faster than revenue and the GDP. With baby boomers entering retirement and life expectancy on the rise, mandatory spending, which also includes interest payments on the debt, will consume all federal government revenue by 2038, according to the Congressional Budget Office.

How will this American problem affect the Canadian economy? US politicians will have to cut municipal, state and federal spending, a move that will impact Canadian businesses that have government contracts to provide goods and services. Washington could also raise taxes. Given what we know about the political will of politicians, they’ll choose to raise taxes first. However, a higher tax burden will reduce consumer spending and US investments, two key drivers of Canadian economic growth and export opportunities.

A US GST?

If the United States implemented a 5% federal sales tax similar to the Canadian GST, this tax would only postpone the US budget problem by a dozen years, according to Germain Belzile, professor at HEC Montréal, and Jean-François Minardi, political analyst at the Montreal Economic Institute. In the article "Viewpoint on US Government Finances," Belzile and Minardi argue that if the American government wanted to offset the growth in mandatory spending, the federal sales tax would have to reach 15% in 2035. At this level, US economic growth and consumer spending would suffer, thereby directly affecting our economy.

The US market may become less attractive to Canadian businesses in the future, especially if the recovery is slow to materialize and Americans revert to their protectionist ways by favouring their own businesses at the expense of free trade.

It’s worth noting that from 2007 to 2012, the proportion of Canadian goods exported to the US fell to 74.5% from 79%, and imports of American products to Canada dropped to 50.6% from 54.2%. In this context, it would probably be logical for Canadian exporters to diversify their trading partners.

About the Author

David Descôteaux


David Descôteaux is a Montreal-based business columnist.

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