Obama or Romney: Who’s Better for the Canadian Economy?
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As the Presidential Campaign picks up steam, following both the Republican and Democrat National Conventions, I wanted to take the time to examine how each candidate (and their parties) will influence the Canadian economy if elected.
Whether we Canadians like to admit it or not, the US elections have a significant impact on our economy. After all, the US is our biggest customer and currently purchases about 69% of all our exports.
Given the nearly $1 trillion in bilateral investment and trade every year between our two great nations, the decisions of our leaders will greatly affect Canada’s GDP growth and, on a more personal level, what investing strategies individuals adopt.
Going on his record, Obama has proven to be a President who believes the US needs to spend its way back to prosperity by creating new jobs and industries through government investment. He has found both success and failure with this strategy. Regardless of the outcome, this strategy greatly affects the value of the Canadian dollar as the US has borrowed more money under Obama than under any other administration (roughly $5 trillion).
This has increased the value of many commodities, due to inflation, thatCanada exports globally. Naturally, this has helped keep the Canadian dollar strong, as it is a commodity based currency, and nearly on par with the US dollar for several years. At first glance one might assume that higher commodity prices are good for Canada.
However, this is not necessarily the case, especially when the US is our biggest customer. When the Canadian dollar is nearly on par with the American dollar for a prolonged period of time, it hurts our manufacturing sector and exports, as our goods become more expensive for our biggest customer. Though a rising Canadian dollar certainly helps our imports from the US, Canada exports far more to America than we import.
If you take Romney at his word and he follows through with budget cuts and entitlement reforms, this should help the USD regain strength against the Loonie. This would help our export market by making Canadian goods cheaper for the US. With that said, I’m not entirely convinced that a Romney administration would in fact cut the deficit a heck of a lot faster than the Obama administration.
The last Republican administration was not fiscally responsible. Clinton left the White House with a budget surplus in place which was eroded during the Bush administration. Let’s not forget the famous quote from Republican VP Dick Cheney. He told the former Treasury Secretary, Paul O’Neil, that “deficits don’t matter” - a quote that has come back to haunt the Republicans.
Romney may cut spending for social entitlement programs, but he has vowed to increase defense spending. In addition, if he does start a trade war with China (he has said he will deem them a currency manipulator if elected), the Chinese could retaliate by selling US bonds, which could further drive down the value of the US dollar.
So, which leader would ensure a stronger and more stable US dollar, and in turn increase the country’s purchasing power for Canadian goods? Well, it might be too close to call- so let’s use recent history as our guide.
When the Reagan and Bush Senior Republican era began in 1981, it took $1.18 Canadian to buy 1 US dollar. When Bush Senior left office in 1993, it took $1.20 Canadian to buy 1 US dollar (remained relatively stable for that 12 year period). When Bill Clinton became President, it took $1.20 Canadian to buy 1 US dollar. When he left office 8 years later, it took $1.55 Canadian to buy 1 US dollar (this was hugely beneficial for Canadian exports).
At the start of the Bush administration (in 2001) it took $1.55 Canadian to buy 1 US dollar. In Bush’s final year in the White House, it took $1.07 Canadian to buy 1 US dollar. It currently takes about $0.99 Canadian to buy 1 US dollar. Under Obama, the value of the US dollar has continued to erode against the Loonie, just not as fast as it did with Bush in power. When deciding who would be better for the Canadian dollar, based on a stronger US dollar, recent history shows that it would be the Democrats.
Keystone XL Pipeline – A Huge Revenue Generator and Economic Boost for Canada
Following Obama’s decision to delay the Keystone XL Pipeline, the Canadian Building Trades Union stated on their website,
“This delay means direct impact on about 3,500 pipeline construction jobs in Canada for three construction seasons and more than 17,000 in the United States over the same period. These are real jobs for real people in the construction industry.
This decision also puts into question further investment and expansion in the Oil Sands (as oil sand producers were to put their product into the pipeline). The oil sands are major employers of skilled trades construction workers from every corner of Canada. Currently, there are more than 100,000 members of the Canadian Building Trades actively employed in the construction and maintenance of oil and gas facilities in Canada.
Uncertainty for oil sand producers means uncertainty for workforce planning and for our contractors who do work for oil sand producers.”
Statement by Robert R. Blakely , Canadian Building Trades. Source: http://www.buildingtrades.ca/Newsroom/Latest-News/Industry-News/Keystone-Delay-means-job-impact-in-Canada.aspx
The Canadian benefit from this pipeline would be billions of dollars annually paid in tax revenue and wages. Obama has said the pipeline will be re-assessed after the election, while Romney has vowed to approve it within his first 100 days in office. The delays in the Keystone XL Pipeline have, at the very least, cost TransCanada several million dollars and delayed an economic boost for Canada.
Canada’s Natural Resource Minister Joe Oliver said “I think that this was disappointing, obviously, and it will be costly for the company. It will mean lost revenue for the province and delayed economic activity for the country.” (source: CBC)
So, just how much in lost revenue?
Stefania Moretti stated, “Nixing the pipeline without plans for another to replace it could cost Canada $632 billion in additional gross domestic product over the next 25 years, according to estimates by the Canadian Energy Research Institute (CERI). Alberta alone would give up $95 billion in royalties.”
Under a Romney administration, the Keystone XL Pipeline would be approved almost immediately. For this particular economic advantage, a Romney administration is best for Canadian interest.
Costly War in Afghanistan
As a close ally to the US, Canada supported our neighbour by joining forces in Afghanistan. And while Canada has officially handed over its battlefield responsibilities to the Americans, the war is still costing Canadians. Canada is involved in training the Afghan National Army and we have roughly 950 soldiers currently deployed in the country. The Afghanistan war has cost Canada between $14 and $18 billion thus far. Once the US leaves Afghanistan, so too will Canada’s financial commitment.
With an Obama victory, the Afghanistan war is expected to conclude quicker than if Romney wins. Obama has addressed the issue many times and has vowed to end the war by 2014. Romney, on the other hand, has left it up in the air and didn’t address the Afghanistan war during his convention speech.
Ending the war in Afghanistan in a timely manner would save the Canadian tax payer money. It would also save America hundreds of billions of dollars in debt, which would help strengthen the US dollar and in turn, help Canadian exports. The US has borrowed trillions of dollars to fight wars in Iraq and Afghanistan, which is hurting its purchasing power.
Judging from what the candidates have told the public (or chosen not to talk about in Romney’s case), and past precedent set by their respective parties, an Obama victory will end the war in Afghanistan much quicker than if Romney wins. In this instance, Obama is better for the Canadian economy.
Who is More Pro Free-Trade for Canada?
History has shown that Republicans have been more pro free-trade between our two great countries. For Canada, free-trade with America is vital to our economic expansion. Canada needs the US as a business partner, more than they need us. It just makes economic sense given its geographic location that the US should be our biggest customer.
Although our exports to the US have shrunken in recent years, China, and much of Asia, have picked up the slack. It does however, cost Canada substantially more to ship our goods overseas than it does to transport them across our border – where sound transportation infrastructure has been in place for decades.
Under the Obama administration, we have seen examples of why Democrats are viewed as less free trade than Republicans. Lee-Anne Goodman reported in an article in The Chronicle Herald that:
“I was reminded anew of that political reality this week when, once again, Republicans tried to stave off yet another outbreak of potential protectionism that threatens to hurt Canada – this time, our thriving ports of Vancouver and Prince Rupert, with obvious ramifications for Halifax, too.
The two Republicans on the five-member Federal Maritime Commission fought mightily to stop a damning anti-Canada report from being sent to Congress. The report alleges that Canadian ports, particularly Prince Rupert and Vancouver, have been unfairly luring lucrative cargo away from American West Coast ports.
But they were outnumbered by the three Democrats on the panel, who allegedly disregarded the majority of submissions asserting that Canada was doing nothing wrong. Instead, they’ve written a report chastising Canadian port authorities while also apparently raising concerns, puzzlingly, about security measures at Canada’s ports.
Their findings caused rare dissent on the panel, with my sources telling me this week that the commission’s two Republicans were furious with the political overtones of the report and its protectionist, anti-Canada sentiments.”
Goodman goes on to state,
“Surprised? You shouldn’t be. Republicans are proud free-traders. They generally don’t like trade protectionism, and it was Republicans, not Democrats, who were sympathetic to Canada’s pleas when Obama inserted protectionist Buy American measures into his multi billion dollar federal stimulus package shortly after he was elected.”
During the 2008 Democrat campaign, both Obama and Hilary Clinton said they wanted to renegotiate aspects of NAFTA, including environmental and labor standards, to improve conditions for American workers.
John McCain, the Republican nominee in 2008 believed that it was integral to maintain positive relations with Canada through free trade in order to receive their continued support as an ally in Afghanistan.
(source: Los Angeles Times article by Maeve Reston. http://tinyurl.com/98va5wq)
The Council of Canadians reported in an article titled Harper’s Buy American proposal to President Obamathat:
There has been much concern and confusion in Canada around the Obama administration’s proposed stimulus legislation, which contains a “Buy American” clause stating the following:
“None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.”
In addition, Obama has been heavily investing in green technologies in an attempt to help America achieve energy independence. This is conceptually a good idea for the US, but it doesn’t help Canada who sells energy to America. Furthermore, Canada sells more oil to the US than any other country. We want America to remain heavily dependent on oil from Canada. It is good for our economy.
Let’s dig deeper on this subject and look at Canada’s exports to the US over the last three years of Bush and the last three years of Obama. Information from Statistics Canada (www.statcan.gc.ca).
In 2006, when Bush was in power, Canada exported more than $361 billion worth of goods to the US. In 2007, Canada exported just over $355 billion worth of goods to the US. In 2008, Bush’s final year in power, which also marked the year of complete economic collapse in the US, Canadian exports to the US grew to more than $370 billion.
The following year, marked Obama’s first year in power. That year Canada exported just over $271 billion worth of goods to the US, nearly $100 billion less than the previous year. In 2010 Canada exported nearly $297 billion worth of goods to the US. Last year, Canada exported just over $331 billion to the US.
Average value of Canadian exports to US in Bush’s final three years: roughly $362 billion
Average value of Canadian exports to US in Obama’s first three years: roughly $300 billion.
Republicans appear to benefit Canada’s export market. For the subject of free-trade between Canada and the US, a Romney victory looks to be in our favour.
Stock Market Performance
The stock market, more particularly the S&P 500, has performed noticeably better under Democratic Presidents. While several different factors outside of the administration can influence the markets’ performance, this isn’t just a coincidence.
The average annual S&P 500 return under a Democrat President is 12.1% (Obama has averaged slightly above that at 12.3%). The average annual S&P 500 return under a Republican President is 5.1%. As the S&P 500 goes, so do our Canadian markets (for the most part). As well, just about all of us have a good portion of our portfolio allocation tied up in S&P 500 companies.
30 year S&P 500 chart:
30 year TSX chart:
*Charts accessed from The Globe and Mail
The S&P 500 averaged the best annual gains (during any president’s term) under Bill Clinton. During Clinton’s Presidency the S&P 500 averaged a monstrous 19.9% annual gain- the internet boom had a lot to do with the high average. It’s worth noting that corporate profits have increased an average of 51.8% under Obama, the best performance for a president since 1933.
A strong performing S&P 500 leads to higher capital gains by Canadian investors, which leads to more tax revenue for our government to use in helping advance our economy.
Of the five economic points I examined in this report, Obama gets 3 nods to Romney’s 2. Depending on how much weight you put on each point, the best US President for the Canadian economy is a matter of opinion.
With that said, I think there is one American who will be far more influential on the Canadian economy than either of these Presidential candidates. That man of course is Ben Bernanke. Until the excessive amount of debt is worked off in the US, the ebbs and flows of the Canadian economy will be at the mercy of Bernanke’s decisions.