Philip Porado
corporate risk
What America needs from Canada… and vice versa | Canadian Insurance

What America needs from Canada… and vice versa

With all the ballyhoo streaming across the 49th parallel about free trade, how to manage a still-teetering economic recovery and the fate of the Keystone XL pipeline, you’d think the U.S. election was taking place next week—as opposed to more than a year from now.

To Canadians accustomed to a parliamentary system that chooses party leaders in semi-cloistered conventions, the bustling U.S. primaries, which place both GOP and Democratic party infighting on full display, must seem insane. And, in a year with rhetoric that’s even more toxic than usual, the noise made it difficult for Canadians to stay focused on their own national election.

But focus they did, knowing full well that October’s victors will come to shape the volume and variety of goods and services that cross what’s traditionally been a friendly 8,891-kilometre border. Changing economic circumstances, along with shifting trade policies, hand the newly elected Liberal government a full agenda of problem solving. Indeed, circumstances dictate a rethink about the way business has been done for the past 10 years.

Canadians enjoyed the petrodollar, plus the shopping sprees in Buffalo and jaunts to Vegas and Florida it bought.

Oil was good to us; but it was too good to last. New extraction methods, a deal to finally end sanctions with Iran, and a loosening of the taps by Saudi Arabia in an effort to retain market share, have created a new normal, and not one Canadian oil companies like. Sure, we could sell the crude that would have run through the Keystone XL to China or other Pacific trading partners; but only if market prices continue to warrant its extraction. With major Wall Street investment firms and other market watchers calling for crude prices to remain around or below $50 a barrel for some time, sector softness could last awhile.

A brighter picture can be painted for Canada’s forestry industry, which sent more than $5.1 billion worth of products south during 2014, according to U.S. Census Bureau data. That’s a strong number, and it happened in a year when the U.S. only realized one million new single-family home starts. The Conference Board, that reliable economics forecasting clearinghouse, is calling for housing starts to hit 1.12 million single-family units this year, and climb to 1.32 million new homes in 2016. Other forecasters at banks and industry associations are making similar calls.

In the face of those predictions, Canadian lumber exports have nowhere to go but up.

Beyond 2016, forecasters predict ultra-low mortgage rates will continue to spur home buying and push U.S. construction up. That’s good news for Canadian makers of other components of construction, including roofing shingles and wallboard (the U.S. bought $3.5 billion worth in 2014) and electrical apparatus, which includes wiring for homes (nearly $2.2 billion worth exported in 2014).

We also sell Americans eavestroughs (which they call gutters), copper, steel and PVC piping, floor tiling, concrete and aggregates, and plywoods by the barge load.

Ultimately, updraft from this demand will extend to mining concerns that extract base materials ranging from copper to zinc, and from which finished goods that fuel the housing sector are made. We also ship tonnes of raw materials to U.S. manufacturers yearly (more than $6 billion worth of aluminum and bauxite, $1.8 billion worth of copper and $2.1 billion worth of what the census classifies at “steel-making materials”).

So, yeah, we’re still hewers of wood and diggers of metals. Being situated just north of a massive economic engine means we’ll always have a lot of branch plant in our economy (we shipped $42.7 billion worth of cars to the U.S. in 2014, along with $3.7 billion worth of engines and $11.8 billion worth of other car parts like dashboards, bumpers and other fittings).

Still, while resources will always form several vertebrae of Canada’s economic backbone, the new Trudeau government must now take charge of managing an expected expansion of what Canada offers to both its largest single trading partner and the rest of the world.

Which begs the question: what’s the U.S. need from Canada that it hasn’t gotten for generations? And how can our new leaders keep Canada from turning into a 21st-century shadow of Ireland in the 1980s? It was a time when the phrase “Ireland’s best export is the Irish” became a slogan for a country whose population packed and left because it was unable to create opportunities for its best and brightest.

Algae to diesel

Trudeau has promised to start with infrastructure projects and other stimulus spending. At a time when rock-bottom interest rates make deficit spending unusually affordable, the approach makes sense.

But let’s look at another sector, alternative energy, where Canada’s done some amazing Ramp;D. Thanks to the Sustainable Canada Dialogues task force, which gets a lot of its funding from UNESCO, we already have a brain trust dedicated to leading us forward.

The group’s 2015 report asserts Canada has enough wind, solar and hydro electricity generation potential to actually become solely reliant on low-carbon electricity by 2035. Translated politically, that means we should have no trouble matching the stated U.S. goal of 26 to 28 percent greenhouse gas emission reduction rates established for 2025 (relative to 2005 levels). While the outgoing Conservatives consistently turned a deaf ear to this discussion, the Liberals will more likely embrace the opportunity federally—as they’ve done at the provincial level to date.

In so doing, they have the power to spur some Canadian firms with great ideas. And U.S. investors, who may sour on far overseas investments if the current secular bull market tapers next year, should be encouraged to bring their capital north.

Canada’s close, and friendly. But it needs to make the case to U.S. private equity investors that it’s also innovative. Private equity investments have a distinct advantage for emerging technologies that take a long time to turn a profit. Private equity investors have deeper pockets and better risk appetites; unlike garden-variety investors, they don’t tend to walk away when markets get turbulent.

Canada’s got some captivating ideas. One firm, Markham, Ont.-based Pond Biofuels, is finding success with a process that captures CO2 emissions from factories into an algae-based biomass. Algae, the firm points out, is very good at doing two things: growing quickly and consuming carbon dioxide.

The goop produced when cultured algae is fed factory emissions can be converted into diesel fuel. In fact, the company says one ton of the algae yields around 100 litres of diesel. And the carbon-infused biomass can also be used as a substitute for coal.

Then there’s Carbon Engineering, a Calgary-based firm that counts a Harvard climate scientist among the members of its executive team. It’s working to commercialize technologies that pull CO2 directly out of the atmosphere. Their systems are aimed at reducing carbon emissions at large industrial facilities, since unlike vehicles the emissions locations are stationary. The planned end-product is pipeline-quality CO2 that’ll be sold to industrial users.

The privately held company is currently testing a plant in Sqamish, B.C. and has plans to eventually re-process much of the CO2 it captures into low-carbon fuels. It sounds very space-age and theoretical, because it is. But it’s also working so far, and the firm has plans for a full commercial plant once the pilot phase checks out. Oh, and Bill Gates is an investor.

Should this trend keep up, Canada could find itself in a 21st-century version of “coals to Newcastle” scenario: selling biofuels to a country that thanks to grants from the Carter administration, actually launched the industry in response to the oil shocks of the 1970s. A majority of U.S. biofuel efforts were abandoned when OPEC nations unscrewed the taps and tanked crude oil prices in the 1980s.

Indeed, developing these technologies in Canada, and distributing them to the U.S. and worldwide, represents a true reversal of fortune, especially if portions of the funding come from American investors. Further, the Sustainable Canada Dialogues task force asserts Canadian producers of hydroelectric power should be given wider access to U.S. power markets.

Trans Pacific turnarounds

Canada also needs the U.S. to help it fully leverage any market advantages stemming from the Trans-Pacific Partnership. The Liberals have promised to ratify the TPP, but also have said they’ll revisit some of the provisions during that process. The treaty also will have to get past U.S. lawmakers. The signatures of a sitting prime minister or president aren’t enough to finalize a deal this big.

Funnily, one surefire win touted by TPP advocates—opening Japanese markets to Canadian softwood dimensional lumber used in home building—may not produce the touted results, because many of the standard sizes cut for North American markets don’t meet the requirements of Japanese builders. Moreover, a steady decline in Japan’s population is expected to reduce demand for new housing units over coming years.

And the timing is terrible. Both countries had their best trade negotiators working on the TPP just as the landmark U.S.-Canada softwood lumber deal went dead on October 12. Ratified in 2006 after years of cross-border lawsuits and demands for returned tariffs, the agreement’s expiration is a major worry for producers in British Columbia and elsewhere. While Japanese markets may one day be lucrative, and exports to China and other Asian countries are growing, it’s unlikely they’ll ever match or replace the billions worth of products B.C. lumber producers export to the U.S. each year. And the U.S. is on record that it’s not keen to renew the agreement in its present form.

Meanwhile, the intellectual property aspects of the trade agreement, which includes drug patents, could provide an opportunity for the U.S. and Canada to apply some moral leverage during the ratification process.

Several countries party to the treaty provide patent term extensions to drug makers designed to cover the time taken up by clinical trials and regulatory approvals—a process that in many cases takes years. Since the patent clock starts ticking the day an applicant files, the extensions are meant to give the developers of pharmaceutical products more time with their products under patent, note Gowlings law partners Scott Foster and Emma Macfarlane in an April 2013 briefing paper.

European countries, the U.S., Australia, Japan and South Korea all offer these extensions, which generally extend five years beyond the end date of the patent. Canada, through NAFTA and other agreements, also recognizes them but does like to move drugs to generic status whenever it can to help manage costs within its nationalized healthcare system.

Some members of the U.S. Congress, eager for a populist election issue, may pounce on drug patent extensions and the related costs to woo senior citizens to the polls. With Census data showing roughly 46 million Americans are over age 65, and the majority of them live on fixed incomes, the strategy makes sense. Likewise, Democratic presidential candidate Bernie Sanders has often suggested Big Pharma would be squarely in the crosshairs of any administration he would lead.

Looking globally, though, the real problem with the patent extensions is how they impact the developing world. Retention of exclusivity for drugs that treat malaria and AIDS could make them too expensive for populations in countries too poor to pay.

“Canada and the US are already mostly on the same playing field in terms of drug patent protection,” says Alan Cassels, a drug policy researcher affiliated with the Faculty of Human and Social Development at the University of Victoria in B.C. “The biggest worry, I think, is for the poorer countries in the world where, yes, patent extension can be fatal.”

It’s a worry U.S. and Canadian negotiators and legislators should think about leveraging for moral reasons. With Obama (a good philosophical and ideological match for Trudeau) in office for another year, there’s an opportunity to produce a final version of the treaty that provides protections to innovators without shutting out those the world has left behind.

Canada’s voters called for change and then acted. U.S. voters appear poised to do the same. This is an opportunity for lawmakers on both sides of the 49th to collaboratively show them they’re listening.

Philip Porado is Content Director for the Advisor and Financial Services Groups at Rogers Media. He’s also a transplant to Canada and a former Washington, D.C. political, legal and securities reporter.

Copyright 2015 Rogers Publishing Ltd. This article first appeared in the Winter 2015 edition of Corporate Risk Canada magazine