US embassy cable - 03OTTAWA1057

UNCLAS SECTION 01 OF 02 OTTAWA 001057 
 
SIPDIS 
 
GENEVA FOR USTR 
 
STATE FOR EB/TPP/BTA AND WHA/CAN - P.NORMAN 
 
DEPT PASS USTR FOR J.MELLE AND S.CHANDLER 
 
USDOC FOR 4320/MAC/WH/ON/OIA/BENDER 
 
USDOC PASS ITC - JENNINGS 
 
TREASURY FOR OASIA/IMI - MATHIEU 
 
E.O. 12958: N/A 
TAGS: ETRD, EFIN, CA, Trade 
SUBJECT:  THE WORLD'S TOP TRADING PARTNERSHIP 
          IN THE MILLENNIUM TRADE SLUMP 
 
SUMMARY 
------- 
 
1.   U.S. and world trade have declined significantly in the 
past two years from their peaks in 2000.   This decline is 
an unusual event which is partly explained by the 
technology/telecoms crash.  The world's largest bilateral 
trading relationship has been affected, with the value of 
trade declining some seven percent over two years - a sharp 
break from the performance throughout the 1990's.  Canada's 
oil and gas exports to the United States have remained near 
the very high levels achieved in 2000 (after several years 
of impressive growth), limiting the size of the tech-driven 
slump.  Canada's imports of pharmaceuticals grew by 90 
percent in the past four years, an expansion which cannot be 
explained by domestic demand.  END SUMMARY 
 
 
SPIKE-SLUMP PATTERN LAST SEEN IN EARLY 80'S 
------------------------------------------- 
 
2.   While year-on-year declines in the value of U.S. 
merchandise trade have been rare in recent decades, our 
country's total trade fell by more than 7 percent over the 
past two years, and exports fell by more than 11 percent. 
The only comparable experience since 1960 was the period of 
major rust-belt restructuring in the early 1980's (exports 
in 1984 were 15 percent below their 1982 level).  Both of 
these export slumps were preceded by export "spikes," in 
which U.S. worldwide exports briefly grew by two to three 
times their trend growth rate. 
 
 
A BREAK IN THE FTA SUCCESS STORY? 
--------------------------------- 
 
3.   U.S.-Canada trade - the world's largest two-way trading 
relationship - has followed this worldwide pattern in recent 
years.  The value of bilateral merchandise trade jumped by 
11.5 percent in 2000 over 1999, capping a decade of 
exceptional growth prompted by the 1989 FTA and the 1994 
NAFTA.  Then, from 2000 to 2002, it contracted by 7 percent 
- about the same percentage as U.S. worldwide trade. 
 
4.   This fundamentally changes the economic environment for 
this post, which (like our GOC contacts) had grown used to 
boasting about our terrific continental trade performance. 
We cannot blame weakness in Canada's economy, which has 
outgrown the U.S. each year since 1998 (averaging 3.7 
percent in annual real growth versus 2.6 for the U.S).  And 
trade in services, while strong, cannot make up for weakness 
in the much larger merchandise sector. 
 
 
ENERGY, AUTOS HAVE HELD UP; TECH AND TRUCKS ARE HURTING 
--------------------------------------------- ---------- 
 
5.   We cannot explain the causes, or predict the 
consequences, of the "millennium trade bust."  However, we 
can point out some of the notable sectoral features of 
bilateral trade patterns over the past five years: 
 
-- Annual two-way trade in computers, electronic 
components and telecom equipment crashed by 47 percent 
(US$14 billion) over the past two years. 
 
-- The acceleration in Canada's oil, gas and petroleum 
product exports to the United States contributed to the 
millennium "spike" by adding nearly US$18 billion to 
our annual imports from Canada in 1999 and 2000.  But 
unlike some other "boom" sectors, these flows have 
since held up well:  they continued growing into 2001 
and declined only modestly in 2002. 
 
-- Passenger cars and trucks - the single biggest 
category in U.S.-Canada trade - has also held more or 
less steady.  On the other hand, two-way trade in heavy 
trucks fell by 38 percent from 1999 to 2002. 
 
PHARMACEUTICALS:  A CLUE TO THE SCALE OF RE-IMPORTS 
--------------------------------------------- ------ 
 
6.   Among major categories of U.S. exports to Canada, the 
strongest percentage growth has been in pharmaceuticals. 
Over the past four years (2002 over 1998), Canada's imports 
of pharmaceuticals from the U.S. swelled by 65 percent. 
Imports of pharmaceuticals from all other countries grew by 
125 percent.  COMMENT:  As Canadian authorities found with 
cross-border cigarette smuggling in the early 1990's, these 
figures may provide a sense of the extent to which U.S.-made 
products are being "cycled" through Canada and re-imported 
to U.S. consumers. 
 
CELLUCCI