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What’s next for Canada and the U.S.?

ASK THIS | January 25, 2006

With Conservatives taking power in Ottawa, relations between the two countries, now at a low, could be on the mend. As Nieman fellow Bill Schiller points out, these days, because of oil, we may need Canada a lot more than Canada needs us.


By Bill Schiller
Bill_Schiller@harvard.edu

Q. As a result of oil sands discoveries and developments in technology, Canada now boasts the second largest proven oil reserves in the world. With oil sands production now exceeding more than 1 million barrels of oil per day, and scheduled to triple by the end of the decade, does the United States have plans to increase its imports from Canada as a way of further lessening its dependence on Middle East oil?

Q. China has made it plain that it intends to increase its trade and ties with Canada and is even eyeing direct investments in Canadian oil sands projects. If Canada chose to diversify its markets and ship increasing amounts of oil to China at the expense of United States, what contingency plans does the U.S. government have to offset any decline in Canadian imported oil and what leverage would it be prepared to use?

Q. Arbiters have ruled in Canada’s favor in a North American Free Trade Agreement dispute involving $4 billion in duties assessed by the U.S. On what basis is the Bush administration refusing to comply with the ruling?

Expect to be told how Canada’s election of Stephen Harper and his Conservative party is welcome news in Washington, where Canada-U.S. relations are at an all-time low. It’s true: a more like-minded government in Canada’s capital will help heal a relationship bruised by Canada’s rejection of the Iraq war, its criticism of U.S. foreign policy and a trade dispute involving, of all things, lumber.

But Americans should take more than passing ideological interest in Canada’s swing to the right. After all, American interests here aren’t ideological - they’re strategic. Think oil.

America depends more on Canada for oil than it does on Saudi Arabia. Statistics just released by the Department of Energy show that in November the United States imported 1.8 million barrels of crude every day from Canada, and only 1.2 million from the Saudis. And when imports of crude and refined are combined, the U.S. imported a million more barrels per day from its continental neighbor than from the House of Saud: 2.3 million barrels daily compared with just 1.3 million.

And that’s not a passing phase. Combined imports of crude and refined oil from Canada have exceeded those from the Saudis every year since 1999. Today, Canada is America’s single biggest supplier of foreign oil, providing 17 per cent of all U.S. imports. With an international oil crisis on the boil – and with China aggressively courting Canada for its own share of Canadian crude – Washington has a strong self-interest in ensuring the U.S.-Canadian relationship runs smoothly.

Washington will want to know how new Prime Minister Stephen Harper intends to pursue energy discussions with China initiated under previous Liberal governments, and whether American interests will be affected.

In a speech in Toronto in 2004 Qiu Xianghua, vice-president of China’s Sinopec, put it plainly. “China needs oil resources,” he said. “Canada needs markets.”

Only last fall Canada’s then natural resources minister John McCallum returned from Beijing saying he foresaw China taking as much as 25 per cent of the oil currently being shipped to America. Certainly Harper will bring a friendlier view of U.S. foreign policy to the table. He supported the U.S. assault on Iraq that toppled Saddam and has promised more money for the Canadian military – although he will not commit Canadian troops to Iraq. The Canadian public would not support it.

That said, he has promised to step up Canada’s commitments to NATO operations including Afghanistan where Canadian troops are already on the ground. A 46-year-old Toronto-born economist, Harper forged his political views in the conservative province of Alberta. He can be stiff and uncomfortable in a craft that requires compromise and the building of personal relationships. As a social conservative, however, his views on family, abortion and same sex marriage are in line with those of American conservatives.

His victory was fueled by a Canadian electorate that had lost faith in a Liberal party mired in political scandals and in a Prime Minister, Paul Martin, who had no perceptible vision for the country. The key scandal saw taxpayers’ dollars spent to combat the separatist movement in Quebec, with sizeable kickbacks to the Liberal party.

Harper’s first test in managing relations with Washington will be trying to solve a long festering trade dispute over lumber exports to the U.S. The Commerce Department assessed $4 billion in duties on $10 billion worth of imported Canadian lumber used for home construction across America. The dispute – virtually unknown in the U.S. but a major issue up north – has strong symbolic value in Canada. Arbiters for the North America Free Trade Agreement ruled in Canada’s favor. But Washington has refused to pay – even though the former chief of staff of the President’s Council of Economic Advisors has said publicly that the duties should never have been levied.

If the Bush administration wants to show its support for a newly elected, like-minded leader, helping Harper pass that test would have major impact and help heal the relationship.



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