Montreal, April 12, 2003  /  No 123  
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Harry Valentine is a free-marketeer living in Eastern Ontario. He can be reached at
by Harry Valentine
          Over the past several weeks, a strain has developed in US-Canada relations. On the diplomatic level, a planned presidential visit to Ottawa "is under review" while on the private level, Canadian citizens have become ineligible to participate in some American auctions that are conducted on the Internet. A few American Web sites have even encouraged Americans to boycott products from Canada, France and Germany. Names of major Canadian companies which export consumer items to the USA, have been listed along with names of several French and German companies. A large anti-war movement does exist in the USA; however, only very prominent American anti-war proponents seem to have been targeted for reprisal.
Sanctions and declining economies 
          Canadian industries have been experiencing various degrees of American economic sanctions, beginning long before the Iraq conflict. The tariff on Canadian softwood lumber is one such example. It put a few hundred Canadians on the unemployment lines. However, American critics of their own government's economic policies have shown that their softwood lumber tariff is having a detrimental effect on the American housing market. The tariff has raised American home construction costs, benefiting a few politically well-connected American softwood companies. American home buyers have been forced to pay higher house prices, while at the same time the American housing construction market has begun to cool off. While pro-war Americans may want to impose sanctions on Canadians due to the strong Canadian anti-war sentiment, those same sanctions have the potential to undermine various sectors of the American economy. The softwood lumber tariff (a sanction) is but one example of how sanctions can backfire. 
          Canada's economy is far more interconnected and intertwined with the American economy than that of any other nation. Whatever happens in the American economy will sooner or later affect Canada's economy. When the US Federal Reserve artificially lowered interest rates to below market rates starting in the mid 1990's, the Bank of Canada did likewise. The easy money policy precipitated the high-tech boom in both nations. The policy also caused the misleading market signals that led to the high-tech malinvestment boom in both American and Canadian high-tech stocks, a boom which subsequently culminated in the high-tech bust in both nations. The continued low interest rate policy may not have allowed either the American or Canadian economy to fully liquidate all of the high-tech malinvestment.  
          At present, the American economy is in decline. American workers are being laid off in record numbers from their manufacturing, retail and even private service sectors. In contrast, the Canadian economy has developed more new jobs for several consecutive months. Some of these new jobs resulted from American companies expanding operations in Canada, long before the onset of the Iraq conflict. There is however, an ominous side to all the new job creation in Canada. It is occurring during a period of low interest rates. Such rates led to the previous high-tech boom. There is the danger of economic history repeating itself in Canada. Another economic slowdown is possible and it could be compounded by the economic impact of the Iraq invasion on the American business sector. 
Long-term economic fallout 
          Both Canada and America have recently engaged in new rounds of public sector hiring, though for different reasons. In America, the new hiring is very directly related to military action in Iraq, fighting the threat of terrorism and homeland security. Recently, the American President asked Congress to approve US $75-billion for the war effort in Iraq. The conservative estimate of rebuilding Iraq is being quoted at US $8-billion, while the Council on Foreign Relations estimated in a recent study that the long-term rebuilding costs could reach up to US $20-billion per year for at least five years. Yale University professor William Nordhaus has estimated a worst case scenario as costing up to US $1.2-trillion, despite profits from future Iraq oil production. Other noted American critics have pointed out that America's continued low interest rate policy has done nothing to facilitate real economic recovery, nor has it enabled all the high-tech malinvestment to be fully liquidated. They advise that the new round of US government spending will merely add to the amount of malinvestment that will eventually have to liquidated, by players in the American economy and by foreign holders of American government debt. 
     « The long-term economic fallout from American action in Iraq will affect the future economic development in both the U.S. and Canada. Real economic recovery could be delayed for several years, despite Canada's recent job gains. »
          The long-term economic fallout from American action in Iraq will affect the future economic development in both the U.S. and Canada. Real economic recovery could be delayed for several years, despite Canada's recent job gains. An American economy that remains stagnant over the long term, or even contracts, is unlikely to reassure foreign holders of American debt. If they switch their investment elsewhere, their action could cause further uncertainty in the American economy and affect Canada's economy as well. Creation of new wealth could stagnate in both countries, giving China a competitive edge in the world's economic arena. In 2001, China graduated an estimated 459,000 scientists and engineers (Newsweek, September 2002), a number almost equal to the total number in the USA. Most of these graduates become employed in industries producing mainly consumer related items. Several of these industries are foreign companies which have relocated a part of their operations to China, in order to remain competitive.  
          During the post high-tech bust period, several American and Canadian companies moved parts of their operations to China. Even Canada's JDS Fitel company did, as a means of surviving economically. In recent years, the economic environment has become more difficult for business in the U.S., with a similar scenario beginning to emerge in Canada. An unprecedented number of new economic regulations were signed into law in both countries, most coming into effect without any debate or discussion before any elected body. This plethora of new economic restrictions not only raises production costs and reduces competitiveness, they increase the difficulty and complexity of conducting business. The new security measures being undertaken to assure homeland security and combat the threat of terrorism have the potential to both impede the movement of goods and people as well as increase the costs of doing so. 
          American entrepreneurs and investors may be forced to open new business operations or relocate existing ones outside the USA, where fewer politically motivated economic restrictions exist. The list may include China, other parts Asia and possibly Alberta. The behaviour of Canada's federal energy department, the Environment department and the Wheat Board, have all contributed to Western Canadian alienation. In the future, should any Canadian federal department or tribunal enact a policy that provokes further outrage in Western Canada, it could provoke Alberta's secession from the confederation. If Alberta then declares all federal economic regulations to be of no force or effect, that region may actually succeed in attracting a virtual windfall of new foreign economic and business investment. 
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