Keystone XL may be dead but Canada’s interprovincial trade barriers are alive and well

Dr. Kent Fellows is an economist and associate program director of the Canadian Northern Corridor Research Program at the University of Calgary’s School of Public Policy

The election and inauguration of U.S. President Joe Biden brings a return to stability and normality south of the border. But for Canada, Mr. Biden’s Day 1 decision to revoke the Keystone XL presidential permit also brings damage to the outlook for Canadian oil exports.

This latest blow to Canada’s trade position comes on the heels of four years of other damaging executive orders from south of the border. While president Donald Trump supported the Keystone XL permit (twice fast-tracking its approval via executive order to avoid lengthy reassessment by the U.S. State Department), he also took unilateral action to force renegotiation of the North American free-trade agreement and issued multiple executive orders imposing punitive tariffs on Canada’s exports to the United States.

The reasons behind the executive orders of presidents Trump and Biden are as different as the men themselves, but for Canada the common element is a pattern of unilateral action detrimental to our exports and by extension our economy. So, how should we respond to the latest development in this pattern?

One option discussed (in particular by Alberta Premier Jason Kenney and Dr. Jack Mintz) is to engage in the initial stages of a trade war by placing tariffs on U.S. imports to Canada. A version of this strategy was employed with some success in Canada’s response to the Trump tariffs. So, as the argument goes, it might be effective in responding to Mr. Biden’s cancellation of Keystone XL.

But it is likely that this argument underestimates Mr. Biden’s resolve. The Trump tariffs were levied for the expressed purposes of reducing the U.S. trade deficit and eliciting concessions from Canada during the NAFTA negotiations. Whereas Mr. Biden has cancelled the Keystone XL permit for one reason: as an act of climate leadership.

“The Keystone XL pipeline disserves the U.S. national interest. The United States and the world face a climate crisis … Leaving the Keystone XL pipeline permit in place would not be consistent with my Administration’s economic and climate imperatives,” according to Mr. Biden’s executive order, dated Jan. 20, 2021

There is no apparent strategy that will reconcile Canada’s desire to see the pipeline completed with the Biden administration’s desire to see it cancelled and so it seems exceedingly likely that this is the final nail in Keystone XL’s coffin.

An important takeaway from the Trump tariffs and Keystone XL cancellation is that Canada needs to think more strategically about the future of our own economy, our non-U.S. international trade relationships and our internal trade relationships between Canadian provinces.

Most Canadian provinces trade more with international markets than we do with each other. This is at least in part because our trade infrastructure now favours north-south connections more than east-west connections. For example, a 2018 Financial Post article (reporting on a 2015 Van Horne Institute study) identified that due to the lack of a permanent east-west over-dimension corridor within Canada, it takes a minimum of 70 days to move an oversized load from the Southern Ontario manufacturing hub to Alberta. By comparison, moving the same load from South Korea to Alberta via a U.S. port takes just 30 days.

East-west initiatives have always served Canada well when our relationship with the U.S. is challenged or challenging. In fact, west of the lakehead, Canada’s economic geography is largely dictated by the route of the Canadian Pacific Mainline , which was chosen in part to fend off potential incursion by American railways (or worse).

Currently, Canada has no strategic plan for intra-provincial or international trade infrastructure. The largest federal initiative in this area is the National Trade Corridors Fund, which has allocated $2.3-billion to selectively fund project applications made by the private sector as well as provincial and municipal governments. (By comparison, the federal government bought the Trans-Mountain pipeline for $4.5-billion and the Alberta government provided $1.5-billion in equity to the now-cancelled Keystone XL pipeline). A cursory browsing of the projects supported by the National Trade Corridors Fund shows that they are a mix of municipal road and transit spending and marginal port, airport and rail improvements. Likely worthwhile spending, but not the type of projects classified as part of a long-term strategic plan.

The type of strategic infrastructure planning that Canada should be contemplating is evident internationally. Most visible is the Chinese government’s One Belt One Road initiative, but there are also examples from Australia, north Africa and in the European Union (through the “Trans-European Transport Network” and “Connecting Europe Facility” policies).

It’s not necessarily that we can’t rely on the stability of U.S. export demand for our continued economic prosperity, it’s that we shouldn’t have to. Canadian exporters at all scales and from all sectors should have interprovincial and international options on where to export. We cannot have those options if we do not build the necessary infrastructure.

In the 1930s, Canadian economist Harold Innis described our economy using a biblical reference: “hewers of wood and drawers of water.” The reference alludes to our economic dependence on resource extraction and trade, implying that we take on menial tasks in service to other economies. But there is no shame in providing a resource if we are compensated for it by a respectful customer and the best way to make sure we always have a respectful customer is to ensure we always have at least two customers.

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