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U.S. President Barack Obama and Vice-President Joe Biden celebrate at their election night victory rally in Chicago, Nov. 7, 2012. (JIM BOURG/REUTERS)
U.S. President Barack Obama and Vice-President Joe Biden celebrate at their election night victory rally in Chicago, Nov. 7, 2012. (JIM BOURG/REUTERS)

Allan Gotlieb and Michael Kergin

America’s cliff is Canada’s priority Add to ...

President Barack Obama has eked out a slim popular vote majority. This slender margin is not reflected in his somewhat stronger numbers in the Electoral College, an 18th-century holdover that brought George W. Bush to power in 2000 despite Al Gore's 545,000 plurality.

Interesting to the political scientist, perhaps, but more worrying for Canadians seeking concerted governance from their southern neighbour is the split in Congress between the Senate and the House of Representatives. The narrow Democratic majority in the Senate mirrors the divide with the stronger Republican House majority that has bedevilled Washington over the past two years and prevented any progress toward confronting the crippling U.S. deficit overhang.

Which brings us to the edge of the Congress mandated "fiscal cliff": dramatic rises in taxes, accompanied by large cuts in expenditures, half of which come from national defence. Termed a "suicide pact," and never intended to be implemented, Congress passed legislation designed to force reluctant politicians to make tough budget choices. This fiscal “abyss” arrives Jan. 1, unless Mr. Obama can use his replenished political capital to muscle a compromise with the lame-duck Congress.

The need for progress towards fixing the U.S. deficit is the single overriding issue currently governing the Canada-U.S. relationship. Respectable economists have calculated that the sudden shock of the fiscal cliff could cost the country up to 5 per cent of GDP, plunging it back into recession. Given the high degree of our economic interdependence, Washington’s inability to correct the deficit will severely impact our own economic health. And it is an open question whether a divided 113th Congress will find the courage for difficult decisions any more than its predecessor, should an ingenious political “fix” allow this Congress to kick the budgetary can down the road and so avoid the Jan. 1 “abyss.”

What of other factors arising from the election critical to Canada's economic well-being? The picture is mixed. Both Mr. Obama's and Mitt Romney's campaigns called for the energy independence of North America. (Alternate energy, such as wind and solar, won’t do it.) This reference, and changes in the routing through Nebraska of the Keystone XL pipeline, point to the likelihood of the Obama White House lifting the stay delaying the pipeline's approval process.

Mr. Obama has promised to reduce corporate taxes to 28 per cent from the federal level of 35 per cent, bringing them closer to Canada's combined federal and provincial rate of 26 per cent. The loss to Canadian competitiveness is more apparent than real, however. The U.S. regime allows so many corporate exemptions and deductions as to bring the actual collection rate down to 15 per cent. We are already heavily disadvantaged.

Finally, the border-trade syndrome: Mr. Obama has provided strong support to the Beyond the Border initiative, potentially the most important development in the Canada-U.S. economic relationship since NAFTA. There is every reason to believe that this process, aimed at reducing regulatory redundancies and easing border security measures, will be continued during the President's second term.

Canada might also see a more positive attitude from the White House concerning international trade. Not having to run for re-election, Mr. Obama has gained some independence from the organized labour. This should provide him greater running room to meet his goal of doubling exports by 2014 by pursuing more enlightened trade policies, Congress permitting.

This brings us back to Congress, which under the Constitution determines the terms of trade, passes legislation establishing regulatory authorities for product and health safety, and sets the budget for the Department of Homeland Security, responsible for managing the border between our two countries. Under the Tea Party's influence stimulated by beleaguered lower skilled workers, it is not a given that the traditional GOP stance of favouring free-trade policies will prevail. Nor is it certain that the democrat Senate will be greatly disposed to promoting more open trading relationships. Progress on these two crucial aspects of the Canada-U.S. relationship will take stronger leadership from the White House than has been the case during Mr. Obama's first term.

More fundamental, however, is the imperative of resolving the impasse over the debt, thereby bestowing politicians with the confidence to initiate trade liberalization measures and approve policies encouraging regulatory cooperation and border facilitation.

The U.S. fiscal situation, therefore, trumps all other Canada-U.S. economic priorities. That said, when Americans reach consensus that their backs are against the wall, they usually find the will, albeit slowly, to pull together.

Allan Gotlieb and Michael Kergin are senior advisers to Bennett Jones LLP and former Canadian ambassadors to the United States.

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