Canada Goes to Vote!

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The last time Canada voted, in 2011, the result was an election of first-in-a-while’s:

  •  the first party to win a majority government since 2000
  • the first Conservative party to win a majority government since 1988
  • the first time since 1962 that a Conservative party won three consecutive federal elections
  • the first time in Canadian history that the Liberal Party won fewer than 40 seats (it got just 34, down from 77 seats in 2008 and 100-plus seats in every other election since 1988)
  • the first time the Bloc Quebecois won fewer than half of Quebec’s parliamentary seats (it won just 5%, down from 65% in 2008 and an all-time high of 72% in 2004 and 1993)
  • the first time the Bloc Quebecois won less than 38% of Quebec’s popular vote (it got just 23%, down from an all-time high of 49% in 2004 and 1993)
  • the first time the Liberals were not one of the top two seat-winners in Canada’s largest province of Ontario
  • the first time the New Democratic Party won more than 43 seats nationally (they won 103, 59 of which came from Quebec)
  • the first time the modern Conservative Party fared decently well with non-white voters
  • the first time the Green Party won any seats at all (though it only got a single one, and it received a lower share of the popular vote, 3.9%, than in any other election since 2000)
  • and finally, the first time since 1984, 1958, and the World War elections of 1940 and 1917 that a single political party won either the popular vote or the most parliamentary seats in each of the eight Canadian provinces outside of French-speaking Quebec and remote Newfoundland (the Conservatives won the popular vote and the most seats in all eight of these provinces, in spite of winning just 39.6% of the popular vote and 54% of seats nationally)

Such a significant Conservative success reflected the fact that Canada’s economy and banking system performed better than those of most other rich-world nations following the global financial crisis. It was in fact only a year after the election that Bank of Canada chairman Mark Carney was enticed to move abroad to run the central bank in Britain, even though the British financial system is far larger, far more worldly, and far less dependent on natural resources than Canada’s, and had never before been run by a non-Briton. The myth of the super-responsible Canadian banker or financial regulator, a sort of modern Mountie in the otherwise cutthroat world of global capitalism, was in full swing. While this myth came mainly from other developed countries like the United States and England, which were desperately seeking an alternative to what they saw as their own untrustworthy financial classes, Canada’s Conservatives banked on the pride and confidence it generated to help them win big in 2011.

Like most stereotypes, this trait of the prudent, conscientious, and highly skilled Canadian banker may be true in certain cases – witness, for example, Brad Katsuyama, the hero of Michael Lewis’ recent financial bestseller Flash Boys – but still it is an exaggeration at best. Even as the Conservatives spoke of how their financial regulators and Canadian bankers had acted with the utmost restraint, the very opposite of greedy and wild Wall Street and Washington, they also enticed Canadian and foreign investors with lucrative dreams of becoming an “energy superpower”, intending the vast oil sands reserves in western Canada and Newfoundland to finally wean America off of the Middle East — and, simultaneously, to diversify Canada’s export dependence away from America by fueling a resource-hungry emerging Asia. Of course, this was still a year or two before “shale” and “fracking” would become household words, and before China’s raw materials imports really started to slow.

Now, with commodity prices having plunged and another Canadian election coming up on October 19, the Conservatives are in a bind. They are attempting to take the credit for Canada’s past successes while trying to shift the blame for its current flirtation with recession onto low oil prices, just as the NDP and Liberals are trying to pin the blame on the Conservatives for the current slowdown while shifting the credit for Canada’s past success onto the previously high oil prices. The NDP leader of the opposition, Thomas Mulcair, recently claimed that “Harper [the Prime Minister] put all of Canada’s eggs in one basket and then dropped the basket”, referring to the government’s support for the energy sector. (Canada is the world’s fourth largest producer of oil and gas, second largest producer of uranium, sixth largest generator of electricity, and fourteenth largest producer of coal). And yet Canada’s economic troubles might in a strange way actually work in the Conservatives’ favour, since they are still thought by many to be the party most adept at achieving GDP growth.

Then again, maybe Canada’s economic slowdown will end up haunting the Conservatives next week. Already this past May the Progressive Conservative party lost a provincial election in the right-wing stronghold of Alberta, where falling energy prices have been hitting the economy especially hard. Not only did Alberta’s Conservatives win six times fewer seats than the NDP did, but they also trailed behind the Wildrose Party, an Alberta-specific party that was formed in 2008, which also finished far ahead of the Conservatives in seats and even nearly beat the Conservatives in the popular vote.

So while nothing is certain yet even at this late stage in the national campaign, it does seem as though the best that Stephen Harper’s federal Conservative Party can hope for is to take the helm of a minority government like it did in 2004 and 2008. This seems to be an achievable goal for the Conservatives, since even if they win fewer seats than they did in 2011, which is likely, they could still benefit from the fact that the NDP and Liberals may divide the anti-Conservative vote along provincial, linguistic, and generational lines, if the NDP again depend heavily on getting votes from young people, British Columbia, and especially Quebec, and if the Liberals again do not.

In foreign affairs, Harper’s Conservatives are keeping to their strongly held anti-ISIS, anti-Putin, and pro-Israel model, while the NDP and Liberals are trying to stick them with the blame of not doing enough for Syrian refugees, polluting the global climate with carbon emissions, fear-mongering over the threat of Islamic terrorism and the spread of the Niqab within Canada, and, as it is often put, “betraying Canada’s traditional peace-keeping role”. (Canadians miss the days, which reached their apex under George W. Bush, when they were viewed as the good guys and Americans would sometimes pretend to be Canadians when travelling overseas). With Canadian soldiers now back from Afghanistan, where they suffered by far the most casualties of any Western armed forces apart from those of America or Britain, few Canadian voters are in favour of embarking on any new “on the ground” military interventions abroad. As a result, much of the debate has been whether or not the country should remain a token part of the international air force bombarding ISIS-held territories in eastern Syria.

The Liberals, who had won ten of the past thirteen federal elections until they were defeated in 2004 and 2008 and then crushed in 2011, have chosen Justin Trudeau, son of four-term former Prime Minister Pierre Elliot Trudeau and actress Margaret Sinclair, as their comeback kid. Trudeau was born less than ten months after his parents wed; his mother was only 22 years old at the time, while his father was 52 and three years into his nearly unbroken decade a half long tenure as PM. Trudeau the Son has had anything but a simple life. His parents were divorced when he was six years old, and his mother continued to be under media scrutiny as a result (among other things) of possibly having relationships with Ted Kennedy, Jack Nicholson, and Ron Wood. Most tragically, one of his two full siblings was killed in an avalanche when he was 27 years old.

In this election Trudeau has often been attacked for his inexperience (he only became an MP in 2008 and party leader in mid-2013), his youth (proving that Canada may be on the verge of entering a topsy-turvy Baby Boomer-led world in which being a 43 years old father of three can still be considered “too young”), his pretty-boy image, and of course his being a political princeling at a time when Canadian voters may be somewhat wary of family dynasties because of the despised W. Bush presidency and the Clinton-Bush faceoff that may be just around the corner south of the border. In 2011 the Liberals received fewer seats than the Conservatives or NDP in every province or territory outside of Newfoundland and Prince Edward Island (which together are home to fewer than 700,000 people) and tied with the Conservatives in Nova Scotia, yet still they remain hopeful that they will bounce back and re-take the Prime Minister’s office. Their trust in Trudeau may prove fruitful: recent polls have for the first time put the Liberals relatively far ahead in the lead with 35 percent support, compared to 29 percent for Harper’s Conservatives and 25 percent for Mulcair’s NDP.

While Trudeau is still seen as a political prince by much of the Canadian public, less well-known is that Thomas Mulcair, the NDP’s candidate for Prime Minister, also comes from a political lineage: his great-great and great-great-great grandfathers were both Premiers of Quebec. Mulcair is the second-born child of ten siblings in a half-Irish Catholic, half-French Canadian family, and grew up outside of Ottawa (on the Quebec side of the Ontario-Quebec border) and later in a suburb of Montreal. As recently as 2007 he was the NDP’s sole member of parliament from Quebec, which has since become the party’s political base. He was not, however, chiefly responsible for the NDP’s undprecedented success in the 2011 election, but rather came to his post as NDP leader following the death of 61-year-old Party Leader Jack Layton, who tragically died from cancer less than four months after his party’s massive electoral upswing that year.

The NDP was until relatively recently seen as a “far left” party many Canadians, but Mulcair has now been trying to position it closer to the political centre by promising, like the Conservatives but unlike the Liberals, to run a balanced federal budget next year and not raise income taxes for even the highest-earning Canadians. When asked in a recent debate about the need to run a deficit in order to provide government stimulus spending for the economy, Mulcair said that “Harper has hit the snooze button while Trudeau has hit the panic button”.

Mulcair has, however, kept more to traditional left-wing NDP positions on other issues like childcare support, corporate taxation, minimum wages, and environmental protection. He has in the past, from 2003 to 2006, served as Quebec’s provincial Minster of Sustainable Development, Environment, and Parks. Quebec is especially important for the NDP, as at the moment they hold 79 percent of its seats – and Quebec has 24 percent of Canada’s seats – compared to just nine percent for the Liberals, seven percent for the Conservatives, and five percent for the Bloc Quebecois.

For a country in which per capita carbon emissions are the highest among G7 economies and where love of the natural environment is held as both a defining national principle and mandatory beer commercial theme, Canada’s political leaders have been surprisingly ungiving on the subject of climate change. While all of the major parties have said they would invest in fossil fuel alternatives like wind and solar – a policy that has already led to a solar panel boom in a country that is not at all rich in wintertime sunshine – none are bullish on carbon taxes. Harper’s position is that they are little more than a left-wing trojan horse for general tax increases, so he is against them. Trudeau on the other hand is in favour of helping the provinces continue to take the lead on this issue (currently, British Columbia has a carbon tax and Ontario and Quebec cap-and-trade), while Mulcair supports a countrywide cap-and-trade system.

Even the Green Party has not been arguing for carbon taxes as much as one might assume they would. Instead they have been trying to position themselves as more than just a single-issue party, in order to remain more than just a single-seat party. (For the moment they actually possess three seats, because two members of parliament who were victorious as NDP representatives in the last election have since changed their colours to Green). Green Party candidates have been advocating for other popular policies, like a guaranteed minimum income and the repeal of Bill-C51. Party leader Elizabeth May recently told famous Canadian broadcaster Peter Mansbridge that they are likely to win 12 -15 seats and then ideally become a political kingmaker in parliament. This seems highly improbable: hatred of Stephen Harper has now built up to such a great extent among left-wing Canadians that Green supporters may be tempted to vote “strategically” for the NDP or Liberals just so that he will finally be kicked out of office.

Will Harper be kicked out of office? And if so, who will become Canada’s first new Prime Minister in a decade, Trudeau or Mulcair?

Tune in next week to find out.

Canada’s Election – and what it could mean for the TSX

[Update– My predictions in this article were incorrect: the Liberals, led by Justin Trudeau, ended up winning a majority government in parliament. I didn’t see that coming!]

In most countries, investors usually have a clear idea of what they want to see from an election. They want the victory of a competent, “market-friendly” candidate, with a majority government and no significant regional divisions displayed in the country’s voting patterns. This is, in fact, what they got out of the most recent Canadian federal election, in 2011: the right-of-centre Conservative Party won a decent-sized majority government (which was Canada’s first majority government since prior to 2004), winning in Ontario, British Columbia, and the Prairies, while at the same time Quebec abandoned its independence-minded Bloc Quebecois en masse in favour of the NDP, which also became the largest opposition party by a large margin in Ontario, British Columbia, and the country as a whole.

From the perspective of investors, it is unlikely that the 2015 election will be much more favourable than the current situation that exists in Canada. Even if the Conservatives were to win an even larger majority than they have now, which seems unlikely, this would still only be a continuation of the status quo, and would therefore be unlikely to generate any excitement among Canadians or foreign investors. Plus, given that the Conservative leader Stephen Harper has been Prime Minister for just short of ten years now, this status quo may start to become tiring even for investors and Conservatives. It would certainly not induce any sort of “hope and change” optimism that could potentially help stimulate markets in the short-term. To the contrary, the election campaign will probably make Canadians less confident in the health of their economy, as both the Liberals and the NDP may spend it trying to convince Canadians that Harper has brought the country to the brink of a recession.

In contrast, it is not very difficult to imagine that the elections could make Canada less appealing to investors. Here’s one scenario that would be much worse from an investor’s view: the Liberal Party, led by 43-year old Justin Trudeau (the son of a former Canadian Prime Minister) wins a minority government in parliament, while, on a provincial level, the country is regionally divided in its voting patterns, with Ontario going primarily for the Liberals, Quebec voting primarily for the NDP, the Prairie provinces voting primarily for the Conservatives, and British Columbia splitting its vote between two or three of the parties.

In such a scenario, Canada would have changed from having a “market-friendly” majority government led by an experienced Prime Minister and having no regionalist tendencies reflected in its voting patterns, to having a left-wing minority coalition government led by a young inexperienced Prime Minister (who would have been chosen purely because of his family name) and having significant regionalist divisions between eastern Canada and western Canada and between Quebec and the rest of the country reflected in its voting patterns.

If the NDP defeat the Conservatives instead of the Liberals, meanwhile, which is also possible (the NDP are currently the second largest Canadian party in parliament by far), it would bring to power a party that has never been in power before in its history, which until relatively recently was viewed by many conservatives as being “far left”, and which has a leader who is only in charge because of the tragic death of the former leader of the NDP following the party’s unprecedented success in the Canadian election of 2011.

Even worse, a staunchly provincialist party like the Bloc Quebecois, which is currently polling at around 10-20 percent in Quebec, could theoretically end up becoming the kingmaker in a split between the Conservatives and a Liberal-NDP coalition. Investors could turn on Canada to a certain degree if they begin to think that an increasingly fragmented result such as this is likely to occur. Thus, while the defeat of Stephen Harper’s Conservative Party or the loss of its majority position in parliament would not necessarily be bad for Canada over the longer term, it arguably represents a short-term challenge for the Canadian economy – and in particular, for Canadian financial markets – during the election year ahead.

For more on the economic position Canada currently finds itself in, see 5 Challenges for Canada’s Economy in 2015

Finally Passing Gas: 10 Winners and Losers of the Panama Canal Expansion

 

When the Panama Canal expansion is finally finished this spring, the canal will have two new features:

1. Serve larger ships that can carry up to 3x as many containers

2. Serve liquified natural gas (LNG) carriers

It is not entirely clear what effects this will have on world trade, but Panama’s hope is that, in spite of a recent shipbuilding trend toward vessels so large they will exceed even the acceptable post-expansion canal dimensions, the new canal will help to make it cheaper and easier for the commodities and consumers of the Atlantic world to access the industrial economies of the Asia-Pacific.

Like any other major infrastructure project, the canal expansion could create a number of winners and losers, all other things being held equal. Let’s briefly speculate on which nations these will be: 

Possible Winners:

South Korea, Taiwan, Trinidad, El Salvador, Colombia 

LNG markets may be the key to understanding which economies will benefit most from the expanded canal, because:

LNG cannot pass through the present-day canal, but will be able to post-expansion

In recent years natural gas prices have been around 5-10 times higher in East Asia than in North America. Today they are $1-2 per BTU in the US, compared to $8-9 in Japan and $5-6 in Germany

The “shale revolution” has unlocked gigantic supplies of natural gas in the US near the Gulf of Mexico, where there already a large number of LNG import facilities that could converted into LNG export facilities. The existence of these facilities is significant, as it is considerably cheaper and faster to retrofit an existing plant than it is to build an LNG export terminal from scratch.

The United States, to be sure, currently has the greatest number of LNG export projects in the world being planned, with the vast majority of these projects are located along the Gulf coast, not so far away from Panama. Even though only one of these facilities, Louisiana’s Sabine Pass, is expected to be finished prior to 2019, the early 2020’s could see many more come to fruition.

South Korea and Taiwan

A typical assumption has been that China and Japan will be the primary beneficiaries of the canal. China, after all, leads the world in importing commodities and exporting bulk goods, and
Japan has accounted for 40% of the world’s LNG imports – far more than any other country – in recent years.

Yet while China and Japan lead the pack in terms of the value of their absolute trade, they lag far behind both South Korea and Taiwan in the more relevant category of relative trade; that is, the value of their trade relative to the overall size of their economies. As can be seen in the chart below, the economies of China and Japan are not as trade-oriented as those of South Korea and Taiwan. As such, they might not benefit as much from the canal, which is intended to ease trade.

relative trade northeast asia

(*LPG stands for Liquid Petroleum Gasses, such as ethane, propane, and butane. The canal expansion is supposed to help these as well.)

Of course, none of this means that South Korea and Taiwan are risk-free investments. They are not. Ceteris paribus, though, they appear likely to be two of the greatest beneficiaries of the new canal.

 

Trinidad 

Until North American gas is made avaliable to East Asian markets, Trinidad is the sole LNG player in the Americas capable of serving the East. Today Trinidad is the world’s sixth largest LNG exporter and 23rd largest producer of natural gas in general. Trinidad exports 3.5 more LNG than Peru, which for the time being is the only other LNG exporter in the Americas. Trinidad also produces more gas in general than any Latin American country outside of Mexico or Bolivia, both of which it trails slightly.

This is a considerable amount of gas production for a country as small as Trinidad, which has a population of just 1.4 million (including its sister island, Tobago, which is home to just 62,000 people). Trinidad is also the world’s largest exporter of ammonia and second-largest exporter of methanol, which often find their way to East Asian markets as well. Finally, Trinidad is 14 km off the coast of Venezuela, another energy-dependent economy which, in the long term, might benefit by exporting gas and other commodities via the canal.

 

El Salvador 

There are only four countries in the Americas that possess a coastline on the Pacific Ocean yet lack direct access to the Atlantic. These are Chile, Ecuador, Peru, and El Salvador. Of the four, El Salvador and Ecuador are the only two which are located close to the Panama Canal. Indeed, Santiago, the Chilean capital, and Lima, Peru’s capital, are roughly 4500 and 2500 km away from the canal by ship, respectively; El Salvador’s capital San Salvador is 1400 km away.

El Salvador is also the only one of the four to have an economy that is not oriented towards exporting commodities to other Pacific states: Ecuador’s economy is based on exporting oil to Asia and California, Chile’s is based on copper exports, and Peru’s is based on a number of commodities. These do not need to pass through the canal; in fact the canal might cause the price of these resources to fall in Pacific markets, which may, perhaps, hurt these countries’ export revenues.

El Salvador, on the other hand, has an economy that instead depends on its relationship with the US; approximately 25% of Salvadorans worldwide already live in the US, and El Salvador exports lower-end manufactured goods to the US, and imports its refined fuels. Being able to access US markets via the canal, as well as other Atlantic markets like Europe and Brazil, could be a big boon for El Salvador.

Colombia 

Colombia is just 230 km from the canal, much closer than any other South American country. Panama was in fact a part of Colombia until the US helped to detach it in 1903, a decade before the completion of the original canal. Given its proximity, the canal’s expansion could help Colombia’s isolated Pacific coast west of the Andes Mountains interact commercially with its much more developed Atlantic and interior mountain cities. This could potentially allow Colombia to achieve a greater economy of scale, helping it to throw its political and economic weight around as the most populous country in South America apart from Portuguese-speaking Brazil.

Moreover, because Colombia’s vast supplies of coal (it is estimated to be the 10th largest coal producer in the world), coffee (it is the 3rd largest producer in the world), nickel (9th largest), bananas (10th), oil (19th), and other goods are much easier to export via Atlantic rather than Pacific ports — as a result of the navigability of the Magdalena River Valley (see map), which stretches from the major inland cities of Bogota and Medellin to the Atlantic – the expanded canal will help Colombian commodities to reach East Asian, Californian, and Chilean import markets.

Colombia_Topography_2

Finally, Colombia has medium-sized natural gas reserves: the 47th largest in the world, according to the CIA Factbook. Indeed, Colombia is the only LNG exporter in Latin America outside of Peru (as Trinidad speaks English, not Spanish). It too could pass gas in the years ahead, in that case.

In a future report, we will discuss the 5 potential “losers” of the Panama Canal’s expansion: Australia, Malaysia, Mexico, Yemen, and Mozambique. We will also discuss how Panama itself may be affected by the new canal.   

America’s Domestic Environmental Geopolitics

In an op-ed in the New York Times earlier this month, economist Paul Krugman asks the question: why have the Republicans moved so far to the right on the environment, going from the introduction of the Clean Air Act of 1970 during the Republican Nixon administration (which passed the Senate, as Krugman points out, “on a bipartisan vote of 73 to 0”), and from the relatively eco-friendly amending of the Clean Air Act during the Republican George Bush Sr. administration in 1990, to the climate change denying, regulation-opposed strands of today’s Republican Party?

Krugman provides a possible answer to his question, writing: “[climate change denying] ideology is only part of the story — or, more accurately, it’s a symptom of the underlying cause of the divide: rising inequality. The basic story of political polarization over the past few decades is that, as a wealthy minority has pulled away economically from the rest of the country, it has pulled one major party along with it. True, Democrats often cater to the interests of the 1 percent, but Republicans always do. Any policy that benefits lower- and middle-income Americans at the expense of the elite… will face bitter Republican opposition. And environmental protection is, in part, a class issue, even if we don’t usually think of it that way. Everyone breathes the same air, so the benefits of pollution control are more or less evenly spread across the population. But ownership of, say, stock in coal companies is concentrated in a few, wealthy hands. Even if the costs of pollution control are passed on in the form of higher prices, the rich are different from you and me. They spend a lot more money, and, therefore, bear a higher share of the costs.”

Income inequality may indeed be the most significant aspect of this story, as Krugman says. Yet there might be some other explanations to this question as well, ones that do not have to do with general shifts in income distribution or political ideology, but rather with specific changes that have occurred to the economic geography and voting patterns of the United States during recent decades. Here are 10 such additional guesses as to why American environmental politics have become more divisive today than they were in previous generations.

1) US Coal Production Moves West 

The United States has by far the largest coal reserves in the world, is by far the largest coal producer in the world apart from China , and was a larger coal producer than China as recently as the 1980s. As you can see from one of the graphs below, US coal production used to come from states located to the east of the Mississippi River (notably, from West Virginia, Kentucky, Illinois, Pennsylvania, Indiana, and to a lesser extent Ohio), but has since moved to states west of the Mississippi — mainly to Wyoming, a state which now accounts for almost 50 percent of all coal production in the United States. To a lesser extent, it has also moved to Montana (which borders Wyoming), North Dakota (which borders Montana), and Texas.

US coal production has moved, in other words, from a number of states that have historically tended to vote Democrat or are swing-states — three of which, Illinois, Pennsylvania, and Ohio, are among the most populous states in the country, and therefore carry more weight in elections — to a single state, Wyoming, which has almost always voted Republican and has literally the smallest population of any state in the country (though, because of coal, Wyoming also has the second highest per capita income of any state). Coal-producing Montana and North Dakota also have been firmly Republican states for decades, and also have relatively tiny populations. The Democratic Party no longer has even close to as much of a political interest in the coal industry as it used to, therefore. Indeed, while states like Illinois and Pennsylvania continue to produce a decent amount of coal today, their economic growth over the past few decades has meant that the value of this coal production as a share of their state GDP’s has dropped by a significant amount.

In contrast, coal production does remain a critical component of the smaller Midwestern economies of Kentucky and especially West Virginia. It is not too surprising, then, that West Virginia and Kentucky have not voted for a Democratic president since 1996. While Kentucky was always something of a swing-state, West Virginia actually used to be a staunchly Democratic state back in the days when the Democrats’ interests were more closely aligned with coal production. West Virginia voted for the Democrats in every presidential election but one between 1956 and 2000; in fact, as recently as the 1980 election it was one of only four states in the entire country to vote for the Democrats.

Meanwhile, as the graphs below also show, coal production has moved from underground mining to surface mining (which tends to be much more environmentally intrusive than underground mining), from producing bituminous coal to producing sub-bituminous coal and lignite (which are much more environmentally inefficient to transport and burn than bituminous coal is), and from being labour-intensive to being far less labour-intensive (meaning that there are fewer coal labourers around who might be inclined to vote against environmental protection; this is probably also one of the reasons West Virginia votes for the Republicans nowadays).500px-Fig_7-2_Coal_ProductionWV_Employment_vs_Production

toptwo

2) Texas and California Switch Parties 

Today it seems hard to imagine that Texas would ever vote for the Democrats, or that California would ever vote for the Republicans. But that it is how it used to be. Prior to Bill Clinton, no Democratic President had ever won an election without Texas. In the presidential elections of 1964, 1956, 1952, and 1948, Texas actually voted for the opposite party as most of the rest of “the South” voted for, and in every presidential election from 1952 until 1988, Texas voted for the same party as New York voted for. California, meanwhile, voted for the Republicans in every presidential election from 1968 until 1992 (there were fewer Latino-Americans, white liberals, and other minority groups over the age of 18 in California back then); in fact, the most recent non-Bush Republican presidents, Reagan and Nixon, both came from California.

As Texas has become firmly Republican and California firmly Democrat, environmental politics have become more politically polarized, since California consumes the third least energy per capita of any US state (and also understands the dangerous power of the environment, as its population faces significant drought, earthquake, flooding, and forest-fire threats), while Texas uses the sixth most energy per capita of any state, and exports by far the most energy in absolute terms of any state apart from Wyoming. Texas is the US’s largest oil producer by far, its largest natural gas producer by far, and its sixth largest coal producer.

3) Declining California and Florida Oil Production

Back when it was a Republican-leaning swing-state, California was one of the country’s leading oil-producing states (it is actually still the third largest oil producer in the US). Oil production used to account for a much larger share of the Californian economy than it does today; however, since the mid-1980s, California’s energy production has gone down and down (see graph below) while its GDP has gone up and up because of its leading role in sectors like technology, tourism, entertainment, and real estate. Though California did briefly look like it might become a major player in the US’s recent shale oil production boom, that no longer seems likely to occur.

Because California is now so crucial to the Democrats (not only in the electoral college, but also financially and in terms of media influence), the Democrats might have had an incentive to be less environmentalist if California’s economy still depended on oil production to the same extent that it used to. (As California’s population has grown so much, it now also faces greater environmental challenges, such as droughts, than it used to, which has also made it more afraid of climate change, and therefore more in favour of environmental protection). If California was still willing to vote Republican, meanwhile, the Republicans might have an incentive to be more environmentalist. California, after all, has 12 percent of the US population and 14 percent of US GDP, both much larger figures than any other US state has. Thus, economic changes and voting patterns in California have probably contributed somewhat to making US environmental politics more divisive.

A similar trend has also occurred in some other important states. Florida, for example, which in the past few decades has grown to become the third most populous state in the US, has seen oil production fall by an astounding 95  percent or so since its peak production in 1978. It too has become a Democrat-voting state more often than it used to, also because of demographic changes. The same is true of Illinois, New York, and a few other states that have not taken part in the “shale revolution” oil production surge of recent years.

California-Energy-Production-All-Sources-Trillion-BTU-1960-2010

oil-prod-graph

florida oil production

New York Oil Production

4) Rising Energy Prices 

Prior to 2014, the past 15 years or so saw oil and coal prices rise by a very large amount. This rise had a polarizing political effect, since, for the states which produce the most energy per capita (virtually all of which are Republican or swing-states), such as Wyoming, North Dakota, Louisiana, Alaska, Montana, Texas, West Virginia, Oklahoma, Utah, and Arkansas, energy production became more profitable, while, for many of the states which do not have much energy production per capita (most of which are Democrat or swing states), such as New York, Florida, New Jersey, Minnesota, Michigan, or Massachusetts, it became increasingly worthwhile to improve energy efficiency and/or increase alternative energy production or natural gas consumption.

Energy efficiency has also been occurring as a longer-term trend in the US (see graph below); it accelerated in some states as a result of rising energy prices in the past decade, but had already started long before that in the country as a whole. Rising energy prices also caused economies like Western Europe and Japan to become more energy-efficient and committed to alternative energy production in recent years, providing an example for many Democrats to aspire to.

Consumpt vs GDP

5)  Rising “Unconventional” Oil Production 

Partly as a result of higher oil prices – not only in the 2000’s, but also in the late 1970’s (see graph below) – there has been a rise in oil production from non-traditional sources in North America, such as Alaska (though Alaskan production has since begun to decline), deep underwater in the Gulf of Mexico, and, more recently, in the Albertan oil/tar sands, in shale deposits in states like Texas and North Dakota, and, expected in the near future, deep underwater off the coast of Newfoundland. Talk of beginning to develop the potentially humongous Alaskan and Canadian underwater Arctic oil reserves also became common in recent years.Crude_oil_prices_since_1861

All of these newer oil sources, however, tend to be more environmentally intrusive than “conventional” onshore or shallower-water offshore production. Thus, supporters of this production (more often than not Republican, of course) have been forced to leave environmentalist ideals further and further behind. Similar trends have often been occurring on a global level as well, and not only in oil production, but in coal production too. And all of this has been occurring during a time when both annual and cumulative emissions of gasses like carbon dioxide and methane are already much higher than they were in past decades.

eia_gom_production

Canadian-Oil-Sands-Production

The graph below shows “proven” oil reserves, not current oil production. The recent spikes in Canada and Venezuela are from estimates about the proven reserves in oil/tar sands:

Oil_Reserves_Top_5_Countries

Alaska_Crude_Oil_Production

And finally, shale oil and shale gas:

z131202OGJxag01

Shale-Crude-oil-Production

6) Rising Commodity Prices 

Oil and coal prices were not the only ones to rise during the 2000s. In part because of rapid manufacturing, construction, and general economic growth in China (and other countries, to a lesser extent), there was also a rise in metal, food, fertilizer, and a number of other commodity prices (see graph below). Because bulk commodities are often highly energy-intensive to produce and to transport, and because mining and in some cases agricultural production also tend to be directly environmentally intrusive, the growth in commodity production that was brought about by rising commodity prices has been an issue of environmental significance as well.

economist_cpi

Notably, as with oil and coal, the production of agricultural and mineral commodities within North America mostly takes place within Republican states or swing states, or else in the Canadian Prairies (in politically Conservative Canadian provinces that are just across the border from Republican states in the US). States like Kansas, North Dakota, South Dakota, Arizona, Nevada, Missouri, Utah, Mississippi, Nebraska, and Idaho are significant producers of agricultural or mineral commodities, for instance, and they usually (or always) vote Republican.

Because the largest commodity reserves tend to be in the vast interior states which tend to have either fairly small or very small populations, these states also get a lot of money per capita for this commodity production, and rely on commodity production for a significant portion of their states’ economic output. And the US (and Canada) really does produce an enormous amount of these commodities; it is far and away the world’s largest food exporter, for instance, which is impressive considering that it is also the world’s third largest food consumer. So, the fact that these states have long tended to vote Republican means that rising commodity prices may have contributed to the Republican parties becoming relatively less eco-friendly compared to the Democrats.

There are only a few exceptions to this pattern. The largest of these are the neighbouring states of Wisconsin, Minnesota, and Iowa. Wisconsin produces agricultural goods like corn and dairy products and almost always votes Democrat; Minnesota produces most of the US’s iron ore (the world’s most traded commodity aside from crude oil), yet has voted Democrat in every presidential election since 1972, and in fact was the only state in the entire country to vote against a second presidential term for Republican Ronald Reagan in 1984; and Iowa – an important state in US politics, because it holds the earliest caucus during the presidential primaries – has an economy that is highly dependent on corn production, yet has shed its Republican-leaning past by voting for the Democrats in five of the last six presidential elections (in part, perhaps, because a lot of its corn is used to create ethanol, a more eco-friendly substitute for gasoline. Also Iowa produces more wind power than any state other than Texas). But even Iowa, Minnesota, and Wisconsin were all among the top ten closest races in the 2012 election among states in which the Democrats won; their populations only gave about 6.5 percent more of their votes to Obama than to Romney.

Because of rising commodity prices, commodity extraction has been an issue of growing environmental significance on a global level as well, particularly within the developing world. This too may have also led to a growing divide between Democrat voters, who arguably tend to be more global-minded in their political outlook when it comes to non-military issues, and Republican voters, who arguably tend to be more nationalist or insular in their worldview.

7) Changing Electoral Demographics 

Demographic changes as a result of immigration and internal migration have changed the US electoral map over time, aiding the Democrats and, as a result, perhaps making them less in need of reaching out to energy and commodity producing corporations in swing states, or to the very rich or super-rich throughout the country, or to the states which depend the most on energy or commodity production (many of which tend to have relatively few non-white inhabitants, incidentally). As you can see from the graph below, the US immigration boom has increased steadily in recent decades, and took off in a big way around 1990. So, immigration to the US is to a certain degree actually a fairly recent phenomenon (ignoring the pre-WW1 immigration boom, which is practically ancient history at this point). In fact, most second-generation immigrants from the heart of the most recent boom are still just turning 18 around now. And even among those who have already turned 18, voting participation tends to rise with age.

USA-Immigration-Annual1

We already discussed the flipping of California from swing state to Democrat state, which was, at least in part, the result of inward internal migration from other parts of the US and external immigration from Asia and of course from Latin America. More recently, immigration from Mexico has flipped the state of New Mexico, which voted for the Republicans in every presidential election from 1968 until 1992, but has now voted Democrat in every presidential election since (with the exception of 2004, when it voted for a second Bush term). In the 2000 election, in fact, New Mexico was surrounded by a virtual sea of red states (see map below), but still voted for the Democrats; it was the counterimage of New Hampshire in that election, which voted Republican but was utterly surrounded by blue states.

2000 US election map

Immigration from Latin America (plus internal migration of young liberals to the city of Denver) may also have led Colorado – the population of which is now 20-25 percent Hispanic – to go from voting for the Republicans in every presidential election but one from 1968 until 2008, to voting for Obama in both of his elections. A similar thing is probably true of Nevada (now 25-30 percent Hispanic, and with a huge amount of internal US migration to Nevada’s Las Vegas metropolitan area in the past decade), which has actually voted for the winning US president in every single election since after 1976 (most of which have been Republicans), and could be about to vote Democrat for the third election in a row in 2016.

Many Democrats also think it may just be on the verge of happening in Arizona as well (now 30-35 percent Hispanic, and with lots of people from across the US moving to Phoenix), which voted Republican in every single presidential election but one since 1948. In 1964, in fact, Arizona was the only Republican-voting state in the country outside of “the South” – see map below. While Arizona did not vote for Obama in either of his elections, it may be that it would have voted for Obama in 2008 had his opponent not been Arizona’s own John McCain. Arizona and Nevada both produce almost no fossil fuels.

1964_Electoral_Map

Immigration may also help the Democrats win the eastern states of North Carolina and Virginia, the 9th and 12th most populous US states, respectively, neither of which produce much fossil fuels. The populations of North Carolina and Virginia are both now around 10 percent Hispanic (in other words, far less than some states, but far more than many other states). The population of Raleigh, North Carolina has also been swelled by a very large amount of internal migration from across the country during the last decade, as has the population of the metropolitan area of the city of Washington. D.C., which extends into Virginia. In fact, the cities of Charlotte, North Carolina and Raleigh, North Carolina have had the US’s two fastest-growing Hispanic populations since 2000, and Washington D.C. was not far behind them. North Carolina had not voted Democrat since 1976 and Virginia not since 1964, but both voted for Obama in 2008 and Virginia voted for Obama in 2012 as well.

Even more importantly, many Democrats think these same trends are now working to help them secure some of the country’s largest states, most notably Florida. Florida has historically tended to vote for the Republicans more often than the Democrats, but voted for Obama twice (and may technically have voted for Gore over Bush in the contested 2000 election which saw a Florida recount, even when the governor of Florida at the time was Bush’s own brother Jeb). Florida’s population is now around 25 percent Hispanic, and in particular has seen a large amount of growth in its non-Cuban Latin American population and among younger Cuban generations. This demographic shift is probably significant, given that the original Cuban generation that has been prominent in Florida’s politics in recent decades tended to be relatively conservative politically, reflecting the fact that in many cases it was made up of middle-class and upper-class Cubans who had to leave Cuba following the Communist Castro takeover there. Florida too produces very little fossil fuels.

Illinois, which in recent decades has been a swing state that has tended to vote for the Democrats, has perhaps seen its Democratic base strengthen as well because of demographic changes. It is now more than 15 percent Hispanic. New Jersey, the 11th most populous US state, is a Democrat state that used to vote often Republican prior to Bill Clinton (and which the Republicans probably hope to retake, which may be a part of the reason why they have been considering choosing the current Republican New Jersey governor Chris Christie as their candidate in 2016), and it now has a population that is approximately 20 percent Hispanic.

Ohio, Pennsylvania, and Michigan, the three largest conventional swing states in the US apart from Florida, have also had fast-growing Hispanic populations in the past decade or so, though their overall Hispanic populations remain only about 3.5 – 7.5 percent of their total populations. (Michigan also had fast-growing immigration from Iraq during the past decade). On the other hand, these states have also seen some outward internal US migration of young voters to other states.

Finally, even Georgia, a firmly Republican state which is the 8th most populous state in the country, could perhaps soon flip to the Democrats, the result of having a fast growing Hispanic population (the 10th fastest-growing of any state since 2000, which now accounts for more than 10 percent of the state’s total population), a large, long-established African-American population (roughly 20 percent of the state’s total population), and some young, potentially liberal families moving to Atlanta (which was one of the US’s fastest-growing metropolitan regions during the 2000s). Georgia also produces very little fossil fuels.

8) External US Geopolitics   

During the Cold War, most Americans saw the Soviet Union as a very real potential threat to their security. The Soviet economy was dependent on producing energy and other commodities, which meant that any energy or commodity production within the United States would significantly hurt the Soviet position. Indeed, it was probably not a coincidence that the Soviet Union collapsed during a period of low energy prices. And it was not only the Soviets that were dependent on high commodity prices: until around the 1990s, the Communist Chinese were net exporters of energy and commodities as well.

Today the US is no longer in a Cold War. In fact, some of the nations in the world that seem potentially the most capable of challenging American power over the medium-term, such as China, Japan, Germany, or India, would all benefit from low energy and commodity prices far more than the US would — while, conversely, close US allies like Canada, Australia, Scandinavia, and even Britain are all significant energy or commodity producers, and so would actually be hurt by (or in Britain’s case, not benefit too much from) such lower prices.

As a result, the US has no real “strategic” geopolitical impetus to support rising domestic energy or commodity production in the way that it used to (though some Americans, particularly Republicans, have recently begun to support rising American oil production as a way to undermine the governments of countries like Russia and Iran). The collapse of the Communist Russian empire in 1990, therefore, combined with the transformation of Communist China from a net commodity and energy exporter to a gigantic commodity and energy importer, has perhaps been helping to cause more Americans (or at least, more Democrat politicians) to favour stronger domestic environmental protection.

9) Keystone XL and the Swinging Midwest

The defining feature of the American electoral system today is that, apart from Florida, every one of the largest US swing states are located in the Midwest (especially if you count Illinois as a swing state, as perhaps is appropriate to do). This may be a big part of the reason the incumbent Democratic party has embraced Pennsylvania’s enormous shale natural gas boom (see graph below), in spite of its potential environmental damage, partially under the guise of loving natural gas consumption as an alternative to dirtier coal consumption. (Shale gas has, for example, allowed the Midwest to retire many of its coal-fired power plants — see map below).

EIA-12-17-graph

CoalRetirementsMap

The electoral centrality of the Midwest may also be one reason the Democrats have refused to allow the Keystone XL pipeline to be constructed, because, by preventing Albertan heavy oil from reaching refineries on the US Gulf of Mexico coast by way of the Keystone pipeline, refineries in the Midwest were given a near-monopoly on Alberta’s oil exports, which really helped the refining industry (and to a lesser extent, people who drive a lot) in the Midwest. This is because the type of heavy oil produced in the Albertan tar sands deposits can only be refined at a certain refineries, of which there are very few outside of the Gulf of Mexico region or the Midwest. Indeed, after around 2009, Albertan oil in the Midwest (which tends to be measured by West Texas Intermediate or Western Canada Select prices – see graph below) began to cost significantly less than oil  in most other places in America or the world (as measured by Brent Crude prices).

Oil_Price_Gap

It might be a bit cynical or conspiratorial to suggest (though others, like the former chief economist of the major Canadian bank CIBC, Jeff Rubin, have come very close to suggesting it), but it does seem possible that the Democrats’ blocking of Keystone by invoking environmental concerns was, at least in part, a political ploy intended to help them secure their influence in the Midwestern swing state region, while at the same time having the added benefit of denying financial profits to the Republican states and businesses on the Gulf coast, depriving the Republican-friendly Albertans of an even larger amount of profits, and channelling environmentalist ire toward Albertan tar sands production instead of toward Midwestern activities supported or tolerated by the Democrats, such as shale energy production, coal production, auto-manufacturing, suburban sprawl, and certain types of environmentally-intrusive farming.

Because this dynamic only emerged in recent years, as a result of the rise of Canadian tar sands oil production and the shale oil boom in North Dakota (which had by far the largest oil production growth of any US state, and which competes with oil from neighbouring Alberta and Saskatchewan for pipelines, trains, etc.), it may have contributed to the recent rising politicization of environmental protection.

10) Midwestern De-industrialization and Southern Industrialization 

In recent decades, the US manufacturing sector has become much smaller as a percentage of US GDP, and also much less labor-intensive. According to Business Insider magazine, the United States saw its manufacturing jobs decline by 32 percent during the 2000’s. Because many manufacturing industries are energy-intensive and resource-intensive, this means that there are fewer voters who have a very direct stake in environmentally damaging work. De-industrialization has also been something of a regional affair, occurring the most within Democrat or swing states in the Midwest/Great Lakes region, such as Michigan, Ohio, and Pennsylvania. Among other things, these states produce cars and trucks (and components for cars and trucks), which, while still a very large cause of pollution in North America, have nevertheless become much more fuel-efficient than they used to be. Some Republican states in the South, in contrast, have actually been industrializing (and in particular, growing their auto-manufacuring) in recent years and decades.

The 10 Largest “Relative” Trade Networks

If you follow the financial news media, you will frequently hear of countries’ largest trade partners being either the United States, the European Union, or China. As a result, it can often seem like the US, EU, and China are at the centre of massive global networks of international trade. In a certain sense, of course, they are: the combined external merchandise trade of the US, EU, and China is equal to an estimated 11 trillion dollars a year. And yet, relative to the enormous size of their GDPs, the US, EU, and to a lesser degree China do not actually trade very much compared to most other countries.

North America and Europe are in fact relatively insular in their international commercial relations. The US and the EU, for instance, trade an amount of goods estimated at around 25 percent of their GDPs; by comparison, Germany trades an amount equal to an estimated 70 percent of its GDP, South Korea trades an amount equal to roughly 80 percent of its GDP, and the Netherlands trades an amount equal to roughly 150 percent of its GDP. Even China, which is generally viewed as a highly trade-dependent economy, trades an amount that is equal to only an estimated 45 percent of its GDP, which is lower than most of the countries in the world.

In other words, the economies of the US, EU, and China only seem so trade-oriented because their massive economic size makes them the largest trade partners of a large majority of the world’s countries.  This confusion stems from the fact that the media tends to view the size of international trade values in absolute terms only, rather than by looking at the size of those trade values relative to some other relevant factor, such as the size of the GDP’s of the countries involved in the trade. By looking only at absolute trade values, the huge economies of the US, EU, and China end up getting almost all of the public attention, even though their “relative” trade with most other countries actually tends to be relatively insignificant.

In this article, therefore, we have tried to quantify the international trade networks of the world’s major economies in relative terms; specifically, by dividing the absolute value of their trade by the size of their trade partners’ respective GDP sizes. We already did this with Ukraine and Canada in previous articles, and found some interesting results in both cases. In this article, we will try to make similar graphs for the trade networks of China, the United States, Germany, Japan, Britain, Brazil, Russia, India, Australia, and Turkey.

Before we begin, however, it is important to note that measuring trade values is not always a simple process. There are a number of reasons why the following graphs should be viewed with a grain of salt. For example, the data they were made with may be inaccurate in some cases (the absolute trade values in  data was taken from the MIT’s Observatory of Economic Complexity; the GDP data was taken from the World Bank). It also only includes trade in goods, ignoring trade in services, international investment flows, illegal smuggling, or tourism.

Arguably, the data can also be misleading in some instances, because it over-emphasizes trade hubs like Singapore, Hong Kong, Belgium, and the Netherlands (and, as a result, perhaps under-emphasizes the trade of countries that are closely commercially integrated with these trade hubs, such as Germany or China). It also treats Hong Kong as an independent economy rather than as part of China, which it probably should not do. Finally, since the Observatory of Economic Complexity only gives data for countries’ top 20 absolute trade partners, in most cases these graphs will still ignore some small countries. For example, the Bahamas probably has a huge relative trade relationship with the US, but it was still too small in absolute terms to be included.

All that being said, I think these graphs might be interesting and instructive. So, here they are:

China – Exports: $2.1 trillion, Imports:$1.4 trillion

China's Absolute Export PartnersIn the graph above we see China’s “absolute” export patterns – in other words, the type of trade patterns we would normally hear about in the media. The US buys an estimated 19 percent of China’s exports, Hong Kong buys an estimated 11 percent of China’s exports, Japan buys 8 percent, and so on. In the graph below, however, we see China’s “relative” export patterns, which tell a very different story:

China's relative exportsAs you can see, in relative terms (i.e. relative to GDP size), Hong Kong buys way more of China’s exports than any other economy does. (And of course, as we said earlier, Hong Kong should actually probably be considered part of China). Singapore and Malaysia, both of which are partially Chinese-inhabited, are next after Hong Kong, followed by Thailand, Taiwan, and South Korea. The US, meanwhile, which had a strong lead in China’s “absolute trade” export patterns, scores very low in this relative trade graph.

China relative and absolute importsHere we see China’s import patterns, both relative and absolute.  The US, though it supplies China with an estimated 8 percent of its overall imports, scores at the very bottom of China’s relative imports list, far behind every other country apart from France. Hong Kong again scores number one in terms of relative trade, but its dominance on relative imports is not nearly as high as it was with exports (this is because most of China’s imports from Hong Kong’s are of services, rather than goods, and the data here does not include services). Taiwan, conversely, is much higher on this imports graph than on the exports graph above. Angola, which was not even on the exports list, scores extremely high in terms of relative imports, because of the oil it supplies China with. Other resource suppliers like Chile, Saudi Arabia, Iran, and Australia also have higher scores on this relative imports list.

USA – Exports: $1.3 trillion, Imports: $1.8 trillion

us relative and absolute exportsHere we see that Mexico is higher than Canada in relative terms, even though Canada is higher in absolute terms. We see that Hong Kong is very high in relative terms, more than 7 times higher than China is (though perhaps most of the US’s exports to Hong Kong are really going to China anyway), as is Singapore. Latin American countries like Chile and Colombia score high in relative terms, as do Belgium, the Netherlands (though both may be trade hubs for US exports to other European countries), and Switzerland. US allies South Korea and Taiwan also score high in relative terms. Major economies like Britain, Germany, France, Japan, China, India, and Italy all score very low in relative terms.

us relative and absolute importsFor US imports, Mexico actually scores almost twice as high as Canada in relative terms (and this does not even include massive narcotics imports from Mexico). Ireland and Vietnam both score very high (higher even than Canada), followed by Colombia, Thailand, South Korea, Taiwan, and China. China scores much higher here than it did in terms of US exports. Nigeria also scores highly, since it sells oil to the US. For the US’s absolute imports, four countries dominate: China, Mexico, Canada, and Japan.

Germany – Exports: 1.32 trillion, Imports: $1.09 trillion

Germany relative and absolute exportsIt is interesting to note that France, which buys more of Germany’s exports than any other country does in absolute terms, scores far lower in relative terms than most of the countries in Central and Eastern Europe. Given that most Eastern European countries are still developing, the fact that their relative imports from Germany are so high could be especially significant. Also notable is how tiny the relative exports of Germany to countries like China, the US, and Japan are. Germany is in general the most export-dependent of any economy we will look at in this article.

Germany relative and absolute importsIn terms of Germany’s relative imports, the Czech Republic and Hungary are again at the top of the list, this time joined by Slovakia. Britain scores lower on this list than it did in the exports list. Norway, which sells oil and gas to Germany, scores much higher. Russia, which also sells oil and gas to Germany, does not score higher, however (though it may be that much of this oil flows through the Netherlands, and is counted as a German import from the Netherlands instead of from Russia). The US scores extremely low.

Japan – Exports: $794 billion, Imports: $793 billion

japan relative and avsolute exportsjapan relative and absolute imports

Britain – Exports: $434 billion, Imports: $615 billion

Britain relative and absolute exportsbritain relative and absolute imports

India – exports: $275 billion, imports: $ 448 billion

india relative and absolute exportsIndia relative and absolute imports

Brazil – exports $247 billion, imports $223 billion

brazil relative and absolute exportsbrazil relative and absolute imports

Russia – exports $470 billion, imports $324 billion

russia relative and absolute exportsrussia relative and absolute imports

Apart from the countries we have looked at so far, France and Italy are the two largest economies in the world in terms of nominal GDP, according to the World Bank. However, since we have already looked at two European countries (namely, Germany and Britain), I made graphs for Australia and Turkey instead. Australia and Turkey are listed as the world’s 12th and 17th largest economies in terms of nominal GDP.

Australia – exports: $249 billion, imports: $240 billion

Australia relative and absolute exports Australia relative and absolute imports

Turkey – exports: $161 billion, imports: $205 billion

Turkey relative and absolute exports Turkey relative and absolute imports

5 Challenges for Canada’s Economy in 2015

Canada, the world’s sixth largest “developed” economy, has been on an excellent run in the recent past. According to figures from the World Bank, Canada’s GDP grew at a faster pace than those of the United States or Britain during five out of six years between 2008 and 2013, and during 10 out of 15 years since 2000. It grew at a faster pace than those of Japan, Germany, and France during more than 20 out of 25 years since 1990.

In 2014, however, Canadian growth appears to have trailed that of the US and Britain, the first time since 2003 that it has lagged behind both at the same time. Now, with oil prices having fallen by more than 50 percent since just the start of October, many Canadians are worried their economy will disappoint even more during the months ahead. These fears may be justified: the Canadian economy could have to face a number of significant challenges in 2015.

Challenge #1: Oil Prices

Lower oil prices, assuming they persist, represent a fourfold threat to the Canadian economy:

1. Oil exports account for a larger share of GDP in Canada than they do in any other nation in the rich world, with the exception of Norway or the Gulf Arab monarchies. In fact, apart from Canada, Norway, or Denmark, every noteworthy developed economy in the world is actually a net importer of oil. Canada, in contrast, is the world’s 10th largest net exporter of oil, and the world’s 5th largest net exporter of oil outside of the Middle East.

As of August 2014, the value Canada’s oil exports were the equivalent of approximately 3.6 percent of Canadian GDP, which means that the 50 percent reduction in the price of North American crude oil that has occurred since August should lead, all other things being theoretically held the same, to a 1.8 percent contraction in Canadian economic output. By comparison, during the “Great Recession” of 2009, Canada’s (and the US’s) GDP shrunk by an estimated 2.7 percent, which is the only year Canada’s GDP has contracted since 1991, when it shrunk by 2.1 percent.

2. Canadian oil sands projects, which in 2013 accounted for roughly 60 percent of Canadian oil production, are on the higher end of the production cost range, with average break-even costs estimated (by some) to be around $80-85 per barrel. This, of course, is without even taking into account most of the environmental costs associated with its production, which tend to be substantially higher than those of other oil projects as well. Newfoundland, meanwhile, which accounts for around 9 percent of Canada’s oil production, also has high break-even costs, since it is primarily engaged in offshore drilling.

3. Most Canadian oil is of the heavy or extra heavy variety, and has a high sulphur content. There are currently very few refineries capable of handling this type of oil; most of the ones that are able to refine it are located either in the US Midwest or along the US Gulf coast. The rapid growth of oil production from shale deposits, however, which is ultra-light oil and “sweet” (meaning it has a low sulphur content), and which in most cases has lower production costs and does less damage to the environment than Albertan oil sands production does, is causing some of these refineries to be retrofitted to handle light, sweet oil instead, potentially leaving much of Canada’s oil output less valuable.

4. None of Canada’s most important trade partners are likely to be among the main beneficiaries of falling oil prices. Canada has one primary trade partner, which is the United States, and three secondary trade partners: China, Mexico, and Britain. The US accounts for more than half of Canadian trade, while China, Mexico, and Britain combined account for close to 20 percent of Canadian trade.

None of these four countries, however, are significant importers of oil, or of energy in general. Net energy imports account for less than 15 percent of the US’s total energy use, and net oil imports were (as of August) equal to just an estimated 1.6% of US GDP, both much lower than in most other developed economies (see graph below). In fact, if oil prices continue to fall, they might drop below the break-even prices of US shale production, Alaskan oil production, or offshore oil production in the Gulf of Mexico, which could hurt the US energy industry and grant oil market share back to the lowest-cost producers such as Saudi Arabia and the other Gulf Arab monarchies.

Developed Economies Energy and oil importsWhat is more, the US is a leading exporter of a number of commodities that may see their prices fall as a result of lower oil prices, such as coal and food. Compared to Northeast Asia or Europe, the US is also barely dependent on importing most important minerals, such as iron ore, copper, or aluminum, the prices of which often correlate with oil prices as well to a certain extent. The US is a net exporter of iron ore, in fact, which has the largest international market of any commodity apart from crude oil, and which has seen prices fall by around 30 percent in the past six months and 50 percent in the past year. (Canada, meanwhile, is the world’s fourth largest net exporter of iron ore). The United States’ wealth of natural resources could prevent it from benefiting too much from falling oil prices.

While China, Canada’s second largest trade partner, has become the world’s largest oil importer, it is actually not too dependent on its oil imports either (see graph), since it produces so much coal domestically, and coal continues to account for over two-thirds of its overall energy consumption. China is actually the world’s fourth largest oil producer, sixth largest natural gas producer, fifth largest nuclear power producer, and largest producer of hydroelectricity, wind power, and energy from biomass. Energy imports account for only around 10-15 percent of China’s total energy usage, which is many times less than in most other economies in Asia, or than most countries in the developed world.

20150123103628Britain and Mexico are not significant net importers of oil either. Britain, unlike other large European economies, is only a very minor importer of oil (it is actually one of the world’s top 20 oil producers, because of the North Sea), while Mexico is the world’s 15th largest net exporter of oil and, despite importing more natural gas from the United States than it ever has in the past, also remains a net exporter of energy in general.

Thus, Canada’s main trade partners are not likely to be among the leading beneficiaries of falling oil prices – at least, not unless their populations respond to cheaper gasoline prices by going out and spending far more money than they otherwise would have. As a result, Canada should not necessarily expect these trade partners to boost their purchases of its exports during the months ahead.

[Note: Japan’s trade with Canada may actually be a little bit larger than Britain’s or Mexico’s. However, this is only because the Japanese economy is much larger than Britain’s or (especially) Mexico’s. Per dollar of its GDP, Japan buys significantly less from Canada than Britain, Mexico, or the US do relative to the size of their own economies (see graph below). This means that British, Mexican, or American economic growth might be more likely to have a stimulative effect on the Canadian economy than the same amount of Japanese economic growth would. Similarly, Mexican growth would probably help Canada more than growth in any country apart from the US would, so it is a shame for Canada that Mexico is a net exporter of both energy in general and oil in particular]Canadaian exportsChallenge #2: Other Commodities 

The price of oil is often correlated with the price of commodities in general, since bulk commodities tend to require a lot of energy to produce and a lot of fuel to transport. This presents an additional risk for Canada, given that Canada is not only a massive exporter of oil, but also of many other commodities. Commodities other than oil account for an estimated 20-30 percent of all Canadian exports. Most of Canada’s most important non-oil commodities have prices that tend to correlate at least somewhat with oil prices. These include not only natural gas and coal, but also industrially used metals like nickel, copper, and iron ore, as well as nonmetal commodities like potash (used for fertilizer) and timber (which in Europe accounts for half of all energy produced from “renewables”), both of which Canada is the world’s largest exporter of. Canada is also the world’s third largest net exporter of electricity, trailing only France and Paraguay, and the world’s largest uranium producer apart from Kazakhstan.

Canadian natural gas, which is by far the most valuable Canadian commodity export apart from oil, has recently been fetching prices far below the global average, since natural gas is costly to ship overseas, and since the US market is already over-supplied because gas is coming up as a by-product in shale oil production. Coal prices, meanwhile, have been hurt by a combination of falling oil and gas prices, slowing Chinese industrial growth, and concerns over pollution in various countries (China included). While coal in Canada receives little media attention because of the prominence of Canadian oil and gas, it nevertheless remains one of Canada’s top four or five commodity exports.

Canada is also the world’s second or third largest exporter of wheat, trailing only the US and maybe France. Canadian grain production tends to have relatively high break-even prices, a result not only of the latitude and climate of farmland in the Prairies, but also of the fact that the Prairies are landlocked and have no access to commercially navigable waterways (unlike US, European, or Argentinian farmland, for example), which are necessary to reduce costs given that grains are bulky goods which even today are expensive to transport long distances overland. In Canada, therefore, export revenues might be hurt more by falling grain prices than they would in other significant grain-exporting countries. The Food and Agricultural Organization of the United Nations estimates that in 2014 global food prices fell by 3.7 percent, the biggest fall since 2011, led by grain prices which fell by around 12.5 percent, with nearly all of that fall occurring during the past six months.

Finally, there is marijuana, which, though it is difficult to be certain, arguably accounts for more of Canadian export revenues than any commodity apart from oil or natural gas. Indoor marijuana production, which is responsible for a large share of Canadian production, is an extraordinarily energy-intensive enterprise, such that falling energy prices may cause Canadian producers to save on input costs. On the other hand, there is the legalization of marijuana in Washington state, which is just across the border from marijuana-growing British Columbia, as well as in states like Colorado and, most importantly, California. Legal marijuana production in the US has taken off in the past year or so, and it will probably squeeze the value of Canadian (and Mexican) marijuana exports.

Challenge #3: China 

The relationship between Canada and China is based around more than just exports of Canadian natural resources to China and imports of Chinese manufactured goods to Canada. British Colombia  in particular has a close economic relationship with China, the result of Vancouver’s (and Victoria’s) Pacific coastline and physical isolation from most of the rest of the Canadian and North American markets. British Colombia sends approximately 35 percent of its overseas exports to China, which is almost twice the share that the rest of Canada does, and 2.5 times the share that the United States does.

Partly as a result of this British Columbian transpacific relationship, Canadian exports to China are equal to roughly 2.5 percent of Canada’s GDP, whereas US exports to China are equal to only 1.3 of the US’s GDP. In addition, there are social and financial ties between Canada and China that are economically significant, albeit difficult to measure precisely, reflecting the fact that roughly 11 percent of British Columbia’s population and 5 percent of Canada’s total population are of Chinese origin — compared to just 1.2 percent for the US’s population, 0.3 percent for the European Union’s population, and 4 percent for Australia’s population.

All of this is to say that Canada will feel the effects of an economic slowdown in China, and not only because of the effect such a slowdown would have (and has already been having) on commodity prices. Canada could be particularly affected by a crisis in southeastern China, if one were to occur, since because of the historical connection between Canada and Britain, most of the Chinese immigrants in Canada have come from Hong Kong and adjacent parts of southeastern China (and spoke southeastern Chinese languages like Cantonese, even though Cantonese is only spoken by approximately 60 million people within China, compared to nearly a billion Mandarin speakers).

Notably, eastern Chinese provinces have had the slowest growth in China every single year since the global financial crisis. Meanwhile, Hong Kong’s economy has slowed immensely in recent years and had an especially difficult 2014, and mainland southeastern China was the slowest-growing major Chinese region in 2014. This could potentially wind up being bad news for the Canadian economy this year.

Challenge #4: The United States   

According to most Canadian economic analysts, Canada’s saving grace in 2015 is likely to be the US economy, which has been rebounding to a certain extent from its relatively poor performances in 2007, 2008, 2009, 2011, and 2013, and which had particularly strong growth in the third quarter of 2014. While this assessment is probably true, it is nevertheless important to point out that the American economic recovery has not been occurring in the areas of the US that have the greatest impact on the Canadian economy.

Most of Canada’s exports to the US go to states in the Northeast or Midwest, on the borders of the Atlantic or, especially, the Great Lakes. Michigan, New York, Ohio and Illinois together receive around one-third of all Canadian manufacturing exports to the US, for example. Yet most states in this region have not performed very well during the years since the financial crisis.

With the exception of states like North Dakota, which have economies based around the production of commodities like oil and agriculture and compete directly in these industries with neighbouring Canadian provinces in the Prairies, most of the best-performing US states have not been near the Canadian border. Instead, they have been in southern or western states, most notably Texas. Ohio, Michigan, and Illinois, meanwhile, were among the slower-growing economies during that same period. These trends have largely continued during 2013 and 2014 (though, on a more positive note for Canada, the economy of Michigan has been doing decently in the past two years, and Michigan is the single largest importer of manufactured goods produced in Canada).

In addition, upstate New York, the only part of the US which borders both Ontario and Quebec, has performed far worse than the New York City metropolitan area through these years. In Michigan, similarly, growth has been stronger in the western part of the state, which does not border Canada, than in the northern or eastern parts of the state, which do. And in Ohio, growth has been stronger in southern cities like Columbus or Cincinnati, which are relatively far away from Canada and the Great Lakes, than it has been in northern, Lake Eerie cities like Cleveland or Toledo.

Falling Energy Prices and US State Economies

In spite of auto-related manufacturing in states like Michigan and Ohio, the US’s Northeastern and Great Lakes states will not necessarily be among the main beneficiaries of the fall in energy prices. New York, for example, consumes the least amount of energy per capita of any state apart from Rhode Island. Northeastern states like Vermont, New Hampshire, and Massachusetts, which have close ties with Canada, are extremely energy-efficient. The Pacific northwestern states, Oregon and Washington state, which are economically integrated with British Columbia, are also energy-efficient. And the Great Lakes are for the most part only partially energy-intensive economies (apart from Indiana, which is quite energy-intensive). Michigan consumes the 16th least amount of energy per capita, while Pennsylvania is 20th, Illinois is 25th, and Ohio is 28th.

Moreover, the area in and around the Great Lake states is one of the major energy-producing regions of North America, and therefore may not benefit as much from cheaper energy as some other parts of the US will. Pennsylvania produces significantly more energy than any state aside from Texas or Wyoming, and much more natural gas than any state other than Texas. The West Virginia-Pennsylavania-Kentucky-Illinois-Indiana-Ohio region accounts for around three-quarters of all the coal production in the US outside of Wyoming; coal production which is being squeezed by falling natural gas prices as a result of fracking.Ohio, Illinois, and to a lesser extent Michigan also produce a decent amount of oil themselves, and Michigan has the largest natural gas storage capacity of any state in the country.

Meanwhile, the shale gas basins in this region, namely the Marcellus basin and the (more geologically challenging and expensive to develop) Utica basin, have had by far the fastest productivity growth in recent years of any major basins in the United States (see graph below). In the case of the Utica, which contains significant amounts of both oil and natural gas, the basin encompasses not only Pennsylvania, as the Marcellus does, but also other areas near Canada, like eastern Ohio and upstate New York.

utica gas

us_shale_map

In spite of their historical reputation for loving and making cars, none of the Midwestern states even remain among the top ten states in terms of per capita vehicle ownership. Even Michigan now only ranks around 15th in terms of per capita vehicle ownership. The Great Lakes/Midwest is also one of the leading ethanol-producing, iron-ore producing, and food-exporting regions in the entire world, which could hurt as food, fuel, and mineral prices have been falling.  Finally, cheaper oil could make it cheaper for people living in northern cities like Buffalo to fly south or west, spending more time and money in sunnier states, or in the Rocky Mountains.

It may also be worth mentioning that, even as American growth is generally a good thing for the Canadian economy, the fact that the US is growing at a decent pace at a time when countries like Russia, Japan, Germany, Brazil, and possibly even China and Mexico are all flirting with recession means that US national power might increase at a pace that could become uncomfortable for some of the economies that have to deal with the Americans most often, potentially including Canada.

Indeed, given that US election season is approaching, American politics could perhaps become relatively erratic during 2015. The Republican-controlled Congress, the Democratic-controlled White House, or various US state governments could, for instance, place indirect restrictions on imports from various provinces or industries within Canada in order to provide a short-term protectionist boost to American employment growth. They might also run political attacks against the Albertan oil sands during the year leading up to the election: the Democrats in order to energize their environmentalist base; the Republicans (and in some cases the Democrats) in order to divert environmentalist ire away from American coal production, offshore oil production, or fracking.

Challenge #5: Canadian Politics

There is a federal election in Canada in 2015. In most countries, investors usually have a clear idea of what they want to see from an election. They want the victory of a competent, “market-friendly” candidate, with a majority government and no significant regional divisions displayed in the country’s voting patterns. This is, in fact, what they got out of the most recent Canadian federal election, in 2011: the right-of-centre Conservative Party won a decent-sized majority government (which was Canada’s first majority government since prior to 2004), winning in Ontario, British Colombia, and the Prairies, while at the same time Quebec abandoned its independence-minded Bloc Quebecois en masse in favour of the NDP, which also became the largest opposition party by a large margin in Ontario, British Colombia, and the country as a whole.

From the perspective of investors, it is unlikely that the 2015 election will be much more favourable than the current situation that exists in Canada. Even if the Conservatives were to win an even larger majority than they have now, which seems unlikely, this would still only be a continuation of the status quo, and would therefore be unlikely to generate any excitement among Canadians or foreign investors. Plus, given that the Conservative leader Stephen Harper has been Prime Minister for just short of ten years now, this status quo may start to become tiring even for investors and Conservatives. It would certainly not induce any sort of “hope and change” optimism that could potentially help stimulate markets in the short-term. In fact, Harper’s opponents will likely be spending the election campaign trying to convince Canadians that their economy has been brought to the brink of recession.

In contrast, it is not very difficult to imagine that the elections could make Canada less appealing to investors. Here’s one scenario that would be much worse from an investor’s view: the Liberal Party, led by 43-year old Justin Trudeau (the son of a former Canadian Prime Minister) wins a minority government in parliament, while, on a provincial level, the country is regionally divided in its voting patterns, with Ontario going primarily for the Liberals, Quebec voting primarily for the NDP, the Prairie provinces voting primarily for the Conservatives, and British Columbia roughly splitting its vote between the Liberals and the Conservatives.

In such a scenario, Canada would have changed from having a “market-friendly” majority government led by an experienced Prime Minister, and having no regionalist tendencies reflected in its voting patterns, to having a left-leaning minority coalition government led by an inexperienced Prime Minister and having significant regionalist divisions between eastern Canada and western Canada, as well as between Quebec and the rest of the country, reflected in its voting patterns.

If the NDP defeat the Conservatives instead of the Liberals, meanwhile, which is also possible (the NDP are currently the second largest Canadian party in parliament by far), it would bring to power a party that has never been in power before in its history, which until relatively recently was viewed by many conservatives as being “far left”, and which has a leader who is only in charge because of the tragic death of the former leader of the NDP following the party’s unprecedented success in the Canadian election of 2011. (Though notably, he is more experienced than the Liberal party leader).

Even worse, a staunchly provincialist party like the Bloc Quebecois, which is currently polling at around 10-20 percent in Quebec, could theoretically end up becoming the kingmaker in a split between the Conservatives and a Liberal-NDP coalition. Investors could turn on Canada to a certain degree if they begin to think that an increasingly fragmented result such as this is likely to occur. Thus, while the defeat of Stephen Harper’s Conservative Party or the loss of its majority position in parliament would not necessarily be bad for Canada over the longer term, it arguably represents a short-term challenge for the Canadian economy – and in particular, for Canadian financial markets – during the election year ahead.

The Coming US-Argentine Tango

Argentina has the world’s 20th largest economy, 8th largest territory, and 30th largest population, according to the World Bank. Yet Americans have historically had little to do with the place. The United States and Argentina have never been close allies, nor have they been hated rivals. Today the two countries trade just $15 billion or so with one another: Argentina is just the seventh biggest trade partner of the US in Latin America, and the US is only the third biggest trade partner of Argentina. Most Americans cannot name a single Argentinian person, past or present. No, not even Lionel Messi!

There are a number of fairly straightforward reasons why the US and Argentina have not become too close to one another in the past. Interestingly, however, there are also a number of reasons why the US and Argentina might become quite close in the future. Given the size of both countries, any such move towards one another could represent a significant evolution in world affairs. Let’s try to lay out the case for why this might happen, then, beginning by looking at some of the reasons why Argentina and the US have never been close in the past, and then moving on to why they might finally become so in the years or decades ahead:

1. Distance

Even in the modern world, there remains a strong correlation between physical distance and international trade. This correlation matters for trade between the US and Argentina, since the two countries are located on extreme opposite ends of the Western Hemisphere. The flight from New York City to Buenos Aires takes about 11 hours, for example; it is longer even than the flight from New York to Moscow, or from Buenos Aires to Johannasburg. Flying from Las Angeles or Chicago to Buenos Aires is longer still.

By ship, Argentina and the US are even further apart than they are by air, since the detour around Brazil (which juts far out into the Atlantic Ocean) adds an additional 2500 km or so to the trip from New York to Buenos Aires. That makes it about 30 percent further by ship than by plane. In addition to this detour around Brazil, the journey through the Panama Canal adds a significant amount of time, canal fees, and size limitations to container ships travelling from the US West Coast to Argentina. And taking an overland shortcut through Chile can still be very difficult for transporting bulk goods, as there are no railways or all-season roads which fully cross the Andes Mountains.

3-623-31031-XWesternHemiPhy

Argentina’s trade is not only impacted by its physical isolation from the US, but also by its physical isolation from Europe and East Asia. Sailing from Buenos Aires to Shanghai, for instance, whether by going westward across the Pacific Ocean or eastward across the Atlantic and Indian Oceans, is roughly two and half times further than sailing between Las Angeles and Shanghai. Sailing from Buenos Aires to Paris is around two times further than from New York  to Paris. Partly as a result of this phsyical isolation, Argentina is not well-integrated into global trade networks.

In fact, Argentina’s overall international imports and exports of goods are equal to just around 25 percent of its GDP, according to the World Bank. This is the second lowest share in the entire world among developing countries (see graph below). Plus, nearly a quarter of Argentina’s trade is with Brazil, which is even less trade-oriented than Argentina is. Thus, in addition to not trading much with the US directly, Argentina also does not have much to do with the global commercial system as whole, and therefore also has few indirect commercial connections with the US.

trade as % of gdp in developing economies[Note, by the way, that Argentina is an exception to two different trends displayed by this graph. The least trade dependent economies tend to be extremely large — like Brazil, Russia, India, Indonesia, China, and to a lesser extent Turkey and Mexico — and/or tend to have relatively low per capita incomes, like Nigeria, India, Indonesia, Colombia, Iran, and to a lesser extent China and Venezuela. These trends exist not only among the countries shown in this graph, but also throughout the world as a whole: the least trade dependent economies tend to be either giants like the US, Japan, and Brazil, or else are some of the most impoverished states in the world, like the Democratic Republic of the Congo or the Central African Republic. Argentina is neither extremely large nor relatively poor (it has a per capita nominal income of around $15,000, which is higher than the Latin American average and more than double that of China), yet it is still second from the bottom in terms of its dependence on trade — not only on the graph above, but also among all of the countries in the world, according to the World Bank]. 

2. Economics

Argentina’s economy is driven to a decent extent by its farm output. According to the World Bank, Argentina has more arable land per capita than any country in the world apart from Australia, Canada, or Kazakhstan. Agricultural goods like corn, wheat, and especially soybeans account for well over a third of Argentina’s net export revenues. It also produces the most beef of any country apart from the US, Brazil, China, or India.

This has historically put Argentina in direct competition with the United States, which in the past was an agriculturally-oriented society, and even today remains the world’s largest producer of both soybeans and corn, and the world’s largest exporter of grains in general. Though at present agricultural goods account for perhaps no more than 5 percent of US exports, they continue to play an outsized role in American politics, because their production is spread out across many different states, municipalities, congressional districts, etc. Thus, the US and Argentina continue to compete economically, to a certain degree.

It might be tempting to say that the same is true of Brazil, which is the world’s second largest producer of soybeans and beef, and third largest producer of corn. But actually, most of Brazil’s export revenues come from goods that are net imports of the United States and Argentina, such as oil, iron ore, coffee, and sugar. Partly because of this, in fact, Brazil exports approximately 7.5 times as much to the US as Argentina does, even though Brazil’s overall exports are only 3.5 times larger than Argentina’s overall exports.

3.  Language 

Because of the high utility of the Spanish language, Latin America is one of the worst regions in the world at speaking English. According to English First, “Latin America is the weakest [at speaking English] of all regions, with an average English proficiency score barely surpassing the low proficiency cut-off.” (Spain, similarly, is far behind the other major countries in the European Union in terms of its English language proficiency). Argentina is no exception to this pattern. Only 6.5 percent or so of its population has a “high” level of English proficiency, according to this article. 

In addition to serving as a commercial barrier between the two countries, the Spanish-English linguistic division has also helped keep the US and Argentina apart in the political sphere. Argentina’s Spanish identity, for example, has given it ties to countries which the US has had rivalrous relations with in the past, such as Cuba, Venezuela, Ecuador, Mexico (where the US invaded Mexico City during the 1840’s, and Veracruz in 1914), Spain (which the US fought a globe-spanning war against in 1898, and which had a fascistic government during middle of the 20th century), Nicaragua (which the US occupied in the 1910s and 1920s, and supported guerillas in during the country’s civil war in the 1980’s), Panama (invaded by the US in 1885, and again in 1989), and others. America’s English identity, similarly, has helped given it relatively close ties to Britain, which Argentina fought a war against in 1982 over the Falkland Islands, resulting in more than 900 deaths.

4. Geopolitics

While today Argentina is generally seen as being an insignificant country when compared to its larger neighbour Brazil, this was not always the case. As recently as the 1950s, Argentina’s economy was actually estimated to be larger than Brazil’s. Brazil aslo used to be much more internally divided along both regional and racial lines than it is today (and even today it is highly divided along both regional and racial lines), in relative contrast to Argentina where the population and political power was more closely unified. Indeed, rather than Brazil, it was Argentina and even Chile which were the major military and naval powers native to the region until at least the early part of the 20th century. Plus, because Brazil spoke Portuguese rather than Spanish, its potential influence within the rest of Latin America or Spain seemed comparatively limited. Many therefore predicted that Argentina, not Brazil, would wind up emerging as South America’s “Great Power”.

Of course, the US does not take too kindly to fellow Great Power hopefuls. Thus, it saw no reason to become too chummy with Argentina, particularly following Argentina’s relative victory over Brazil in a war for Uruguay in the 1820’s, and Argentina’s decisive victory over Paraguay during the 1860’s (in a war in which arguably 90 percent of Paraguay’s entire male population died, making it perhaps the deadliest war for a country in modern history). When, for example, the US convened the first-ever International Conference of American States – the precursor to today’s Organization of American States – in 1890, hoping to implement a hemipshere-spanning trade union and formal political network, the conference resulted in feuding between Argentina and the US, and to a lesser extent between Chile and the US, which prevented the US’s political goals from being realized.

Argentina later irked the US during the begining and middle of the 20th century when, partly as a result of the fact that its population had some significant Italian and to a lesser extent German roots, it took a relatively sympathetic position toward US’s adversaries in the World Wars. To this day, Americans often associate Argentina with its providing of shelter to prominent Nazis fleeing Germany following the end of the war. Following the end of the war in 1945, in fact, the United States even briefly tried to keep Argentina out of the newly-created United Nations. Brazil, in contrast, was the only independent South American country to send soldiers to fight on the side of the Allies during the war.

Later still, during the Cold War, the Soviets hoped to gain influence in Latin America to serve as leverage against the United States. While the US was mainly concerned with the close-to-home governments, geurillas, or criminal organizations in places like Cuba, Venezuela, Colombia, and Central America, the bond between Latin American nations meant that the US often viewed the left-wing governments of countries further south, like Chile (such as that of Salvador Allende, who was killed in 1973 in a military coup sponsored by the CIA) and Argentina (such as that of Isabel Peron, who was toppled in 1976 in a military coup that may have been sponsored or supported by the US government), as potential threats as well.

5. Politics 

Argentina and the US are in some ways exact opposites of one another in terms of their political culture and internal geopolitical structure. In the US, no single region holds a majority of national economic power; rather, the country’s economic activity is spread out among a number of different influential regions, such as California, Texas, Florida, the Northeast, the Midwest, the South, and so on. The largest urban area in the US, in and around New York City, only has around 5-10 percent of the country’s total population, while the largest region, the Greater Northeast, only has around 15-20 percent.

Even within the US’s Greater Northeast region, economic power and influence is spread out between a sizeable number of major states, all of which have had their own unique assets — politics in Washington, finance and culture in New York, education and technology in Massachusetts, coal and natural gas in Pennsylvania, shipping and gambling in New Jersey, manufacturing in Michigan and Ohio, services and agriculture in Ilinois, etc. — as well as their own natural harbours on the Atlantic Ocean or Great Lakes with which they have historically been able to engage with the outside world. Divisions like these have arguably made it difficult for a powerful central government to form within the United States.

Argentina is perhaps the extreme counter-example of this sort of highly diffuse American system. The Buenos Aires urban area, which is the political, cultural, financial, and commercial capital of the country, is home to approximately one-third of Argentina’s overall population. Another 15  percent or so of Argentina’s population lives within the general area around Buenos Aires. No other metropolitan area in Argentina has a population that is even more than 10-15 percent as large as Buenos Aires’ is.

[Update:  In Argentina’s presidential elections this past October, the two candidates were the leaders of the province of Buenos Aires and the Autonomous City of Buenos Aires, respectively].

In addition to this, a large majority of both Argentina’s entire population and farmland is located within river basins that empty into the Atlantic at precisely the spot where Buenos Aires is located (see maps below), and the produce of these farmlands is transported almost entirely along these rivers. The farmland of Paraguay, Uruguay, and even of significant areas of Brazil is also located within this basin. Moreover, most of the Argentinian population within this basin is highly dependent on Buenos Aires to ship its produce to international markets, because there are few other natural harbours to serve as ports in northern Argentina apart from the Rio de la Plata Estuary in which Buenos Aires (and Montevideo, the capital of Uruguay) is situated.

Riodelaplatabasinmap

p1960NASA-ASTER-southamerica-map

As such, any government that is able to control Buenos Aires and the region around it faces relatively little challenge in controlling the entire country — at least, absent interference by a foreign power or neighbouring state. Buenos Aires is, in fact, probably quite a bit more influential within Argentina than even cities like London, Paris, or Moscow are within Britain, France, or Russia. Partly as a result of this, Argentina has often seen a lot of “European-style” Big Government, as opposed to “American-style” libertarianistic government. This Argentinian style did not much please the US during its Cold War against the Soviet Union, when Americans saw themselves as being locked in a struggled against centralized socialistic styles of government, which Argentina possessed in an on-and-off fashion prior to the military junta that seized formal control of the country between 1976 and 1983. Argentina also experienced military coups in 1943, 1955, 1962, and 1966.

Even today, Argentina’s government continues to support poltical and economic policies Americans think of as illiberal and overweening, such as high trade tarrifs and high government subsidies of commodities like water and gas. Similarly, the Argentinian government is overwhelmingly viewed by America’s investor class as being populist, corrupt, and dishonest brokers in longstanding disputes over the repayment of Argentina’s foreign debts. In these sorts of ways, the sharp divisions in political culture between the US and Argentina have perhaps contributed to the two countries’ continuing relative estrangement from one another.

10 Reasons Argentina and the US could finally become close in the future: 

1. The Decline of Distance 

While the influence of distance on trade remains large, it is already much smaller than it once was in the past, and may continue becoming smaller in the years or decades ahead. As was alluded to earlier, cheaper air travel could be especially likely to help boost US-Argentine ties, since the distance between the two countries by air is significantly shorter than it is by sea. The Internet is obviously another potential driver behind the potentially declining economic importance of distance — making the fact that Argentina may have the first or second highest rates of Internet access in Latin America, and among the highest in the entire developing world – especially noteworthy. Around 60-75 percent of Argentina’s population is estimated to hae Internet access, up from just 20 percent a decade ago.

Given that linguistic ties will perhaps be very important in allowing for Internet-based economic or social connections to take place, the Internet could also help create indirect ties between Argentina and the US via Mexico and the countries of the Caribbean basin, which are already close to the US commercially and socially even without the Internet. More importantly, it could create direct ties between Argentina and the US as a result of the growing ubiquity and importance of the Spanish language within the United States itself. Which brings us to point number two:

2. Spanish in the United States

As a result of the American immigration boom of the relatively recent past (see graph below), the Hispanic population in the US is currently estimated at 55 million, which means that it is actually larger than Argentina’s entire population is. An estimated 40 million Hispanic Americans speak Spanish at home, up from just 17 million in 1990. US Hispanic populations have a median income estimated at around $40,000 (not far from three times higher than Argentina’s) — compared to $52,000 for the United States as a whole.

USA-Immigration-Annual1

Even if the US’s high rates of immigration from Latin America were to decrease, the number of Hispanic Americans in higher-paying jobs and in the workforce in general would continue to grow quickly over the next few decades, as a result of the fact that there are many Hispanic children, teenagers, and 20-30 year olds in the country. The estimated median age for US Hispanics is 27 years old, for example, compared to 37 years old for the country as a whole. Most Hispanic children and teenagers are American born and raised, and are therefore much more likely than their parents or grandparents to possess the social connections, English language skills, and educational qualifications that are often the prerequisites to achieving financial success in the United States.

Hispanic Americans have also been living mostly within relatively wealthy or fast-growing US economies, such as Texas, California, New York City, Washington D.C., Washington state, Colorado, etc. If the economic and political clout of Hispanics in the US continues to grow, it may create opportunities for Spanish-speaking countries like Argentina to forge greater economic linkages with it. As was mentioned above, this relationship is likely to be particularly significant because of they continued spread and increased ubiquity and sophistication of the Internet. Online connections between Spanish-speakers in the US and Argentina could increase not only in direct terms, but also indirectly via Spanish-speakers in countries like Mexico and the Dominican Republic.

As for Argentinians living in the US, there are only about a quarter of a million. However, this number has been growing: around 60 percent of Argentinian-Americans arrived in the US after 1990, and most came since Argentina’s economic crash in 2001. Most live in Florida, California, or New York. Given that about a quarter of Argentinian-Americans live in Flordia, and that they are significantly more wealthy than the general Hispanic-American population, it is actually theoretically possible that they could play an important role in deciding the outcome of a US presidential election.

 3. Containing Brazil 

Argentina may have had a slightly larger economy than Brazil back in the 1950s or 1960s, but that is hardly the case today. Brazil’s economy has grown to become the world’s sixth or seventh largest, both in nominal terms and adjusted for purchasing power. It is close to quadruple the size of Argentina’s and ten times that of Venezuela’s (Brazil’s next largest neighbour). Brazil’s population, meanwhile, is the fifth largest in the world, around five times larger than Argentina’s and almost two-thirds as large as the US’s. And of course, Brazil’s territory remains enormous, nearly as large as the US’s, Canada’s, or China’s, and triple the size of Argentina’s.

Brazil has the world’s largest resources of freshwater and biodiversity, and it is the second largest producer of soybeans and iron ore, the third largest oil producer outside of the Middle East or North America, and the largest producer of coffee, sugar, raw tobacco, meat products, fruit juice, wood pulp, and a number of other commodities. Brazil has also become the world’s seventh largest motor vehicle manufacturer. (Argentina, meanwhile, is the 19th largest motor vehicle producer; the per capita motor vehicle production of Argentina and Brazil is about the same).

In the past, Brazil’s economy has been hurt by the difficulty of developing its challenging terrain, unifying its disparate regions, accessing the far-away markets of North America, Europe, and Asia, and overcoming its racial and class divisions (Brazil arguably has the most class-based income inequality of any major country, and, relatedly, was the last country in the Americas to outlaw slavery, in 1888). If, however, Brazil can overcome these challenges, perhaps helped by technological advances to do so, it could maybe become a great power in the decades ahead. Notably, unlike in other Great Power aspirants, such as the former Soviet Union, India, or even China, the internal regional divisions in Brazil are not overlain by internal linguistic divisions or milleania-old historical divisions. Nearly 100% of Brazilians speak Portuguese.

If Brazil does end up becoming a Great Power, a US-Argentine relationship would probably form to try and contain it. A powerful Brazil would almost by definition make Argentina feel threatened, for a number of reasons including that Brazil’s influence in Uruguay – a  country of just 3 million people, which was part of Brazil until Brazil lost a war to Argentina in the 1820’s – would put it much too close to Buenos Aires for Argentina to feel comfortable with.

map-of-uruguay

From the US’s perspective, meanwhile, if a Brazil was able to eventually take control of Argentinian politics – whether formally or informally – it might be able to use Argentina’s resources (and also Uruguay’s, Paraguay’s, and Bolivia’s) to become more powerful still. Given that Brazil also has ties to the rest of Latin America and Spain, since Portuguese and Spanish are really not all that different, such a move could theoretically allow Brazil to become a rival global superpower to the United States. The US would almost certainly not want to take the chance of allowing that to happen, and so would probably prefer to ally itself closely with Argentina to begin with to make sure that it never does.

4. Shale Gas 

Today, an estimated 40% of US natural gas production (and the US produces the most natural gas in the world) comes from shale deposits, as does 15% of Canadian natural gas production (and Canada produces the world’s fourth most natural gas). And yet, because of the various challenges associated with shale production, no country in the world apart from the US or Canada produces any significant quantity of shale energy. And even US and Canadian shale production only began in earnest less than a decade ago.

Going forward, it may be that there will be diminishing returns in the US and Canadian shale gas production industries, such that their production costs will rise over time in comparison to the potential production costs of shale gas deposits in other countries. This could make American energy companies – the only ones with the expertise required to produce significant quantities of shale gas – look abroad for gas to develop. Outside of North America, the two largest shale gas reserves are thought to be in China and Argentina. Argentina is also thought to have the fourth highest shale oil reserves, behind only the US, Russia, and China.

Developing China’s shale gas reserves could be difficult for American companies, not only because of potential political barriers between the two countries, but also because of China’s high population density and shortage of freshwater (which fracking uses intensively) in some of its gas-rich regions, and because China’s basins are is in many cases more difficult to develop from a geological standpoint than American ones are. Developing shale reserves in Russia could also be very difficult for US companies.

Argentina, on the other hand, seems like a relatively favourable location for shale gas production. Argentina also wants to boost its gas production, since in recent years its demand for gas has outpaced its domestic supply, forcing it to become dependent on imports from Bolivia. And it has the gas pipelines to do so in place already, since it is has long been a major conventional gas producer (it produces around 13 times more natural gas per capita than China does). This is important, since natural gas cannot be transported in trucks, trains, or barges, like oil and coal can, but instead must have pipelines to move from the site of production to the markets of consumption. Argentina could perhaps become the next mecca for American energy companies, therefore. Chevron has already gotten the ball rolling on this, investing over a billion dollars in the country in 2013.

5. Mexico, the Carribbean, Central America, and Spain  

Argentina may be located on the oppopsite site of the globe from the United States, but Mexico, the Carribbean islands, Central America, and to a lesser extent the northern countries of South America and Spain are not. If these Spanish-speaking countries can become closer to the United States, it could create closer indirect ties between Argentina and the US (though, of course, the reverse of this is also true: if Mexico and the United States were to have a falling out as a result of drug trafficking or immigration issues, for example, it could potentially damage US-Argentinian relations in an indirect way). So, in what ways could these countries be likely to become closer to the US in the years ahead?

One area, of course, is outsourcing. In recent decades, when the United States was looking to save money by outsourcing its manufacturing base, it frequently chose to do so in China. Today, however, Chinese exports are increasingly expensive, and the US increasingly views China as a potential rival. It may be that the US will need to find new locations to outsource to in place of eastern China. Many see India as the likely candidate for this, and maybe they are right; however, the fact is that India, because of its intense regional internal complexities, lacks the political and commercial economies of scale that helped make China (and Japan, and Northeast Asia as a whole) such a significant exporter to the US during the past half century or so. Moreover, unlike Northeast Asia, India is located far closer to wealthy consumers in Europe, East Asia, the Persian Gulf, and Australia than it is to the US, so it may be that its economic ties will mainly be to those areas, rather than to North America. The US, then, may find that Mexico, Central America, and the Carribbean are the economies most likely to become its “next China”.

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Mexico is already well along this path. Its exports to the US have benefited not only from cost increases in China, but also from the Texas shale gas boom, which, because gas cannot be shipped cheaply overseas like oil can, the Texans have been exporting huge amounts to Mexico, which has been helping to keep the cost of Mexican electricity relatively competitive. US exports to Mexico are up almost 450 percent since 1993 (when NAFTA was finalized), while Mexican exports to the US is up more than 600 percent since 1993.

Meanwhile, if the US and Cuba can finally mend fences, it could also obviously be a huge development, since Cuba is not only the largest Caribbean state, but is also located much closer to the US than any other. Given how slowly container ships move, this proximity to US markets could be very important for companies that are using “just-in-time” logistics as more have increasingly been doing as a result of the ability to use sophisticated computer programs to organize logistical networks. Indeed, any move toward “just-in-time” logistics would help grow US trade with Mexico and the Carribbean in general.

The proximity of this region to the US could also help it to grow its American and Canadian tourist industry, which for a number of reasons could increase a lot in the future. (For example, because of the growing number of American retirees, or the possibility of growing seasonal American unemployment as a result of job automation, or the increasing ease of being away from home for longer amounts of time because the Internet). In 2014, just under three-quarters of the estimated 68 million US  tourist visits abroad were to countries within the Americas.

Trade between South America and the US, meanwhile, could also increase because of possible changes in technology. If, for example, machines allow North America to take back much of the world’s manufacturing industry from Asia, it could cause countries like Peru, Chile, and Colombia to export more of their mineral resources northward to the US instead of halfway across the world to Asia. Similarly, the development of once-remote African, Siberian, or Central Asian mineral resources could lead Asian (and European) manufacturers to rely less on South American natural resources than they do today, which could also free them up to be sold to the United States instead.

It is probably also worth mentioning that in the past generation there has been a huge religious shift within Latin America, and particularly within Central America, whereby tens of millions of people who were raised Catholic have switched to become Protestant evangelicals (or, to a lesser extent, to become religiously unaffiliated or atheistic). The share of Protestant evangelicalism has risen from an estimated 4 to 19 percent of Latin America’s population since 1970. Given that more than 50 percent of the US population is Protestant, and that maybe 25 percent are Evangelical, this religious shift might influence relations between the US and Latin America to some degree. In Argentina, meanwhile, an estimated 15 percent of people are now Protestant, more than half of them new converts. Argentina’s population also has the highest rates of secular or atheistic people in Latin America apart from Uruguay, Chile, or the Dominican Republic, also giving it something in common with the “developed” world.

Finally, US ties to Spain will perhaps remain relatively close during the decades ahead. One reason for this is that the US is highly dependent upon Spain’s Strait of Gibraltar in order access to the Mediterranean Sea (and by extension, to access the Indian Ocean and the Black Sea). Another is that the US may want a strong ally in Europe in addition to Britain, in order to keep any potential relationships between major continental European powers like Germany, Russia, and France in check. Spain is arguably a likely candidate to become this ally, since Spain’s economic ties with Germany and Russia are very small compared to, say, Italy’s, France’s, or Turkey’s ties with Germany and Russia. Moreover, Spain has a potential connection to Spanish-speakers in the US, and it already has a relatively significant economic relationship with Britain (and could become by far the main destination for British Baby Boomer retirees in the coming years). Indeed, Spain has already been one of the US’s main European allies in modern times, for example sending more troops to both Afghanistan and Iraq than any European country apart from Britain, Poland, Italy, or the Netherlands.

 6.  Food Exports 

As was mentioned earlier in the article, Argentina and the US have often been economic competitors of one another in the past, as a result of both being major food exporting nations. Today they are still competitors in global food markets, though because the US economy is no longer as agriculturally-oriented as it once was, they do not always compete to the same extent as they used to in the past. If Argentina could reduce its dependence on agricultural exports as well, it could further cause the level of economic competition between the two countries to fall. Of course, the reverse of this is true as well: if Argentina and the US are able to increase their agricultural exports, they would maybe become more competitive with one another again.

One area to watch here is biofuels. Both the US and Argentina (but especially the US) are world leaders in biofuel production, and both might try to increase their biofuel production going forward in order reduce their dependence on oil imports and reduce their carbon emissions. Already, for example, about 40 percent of the US’s world-leading corn production is used to create ethanol, which accounts for around 10 percent of the fuels used by American vehicles. Argentina’s overall biofuel production is lower than the US’s, but its per capita biofuel production is quite a bit higher than the US’s.

If biofuels become the next big thing in “renewable” energy production, such that Argentina and the United States start using much more of their corn and soybean production to create biofuels to use domestically in their transportation sectors, then they will probably not be exporting nearly as much food as they do today, and so will not be competing as much with one another economically. If, on the other hand, their biofuel production decreases, then they could start competing with one another more in global food markets again.

Finally, in the decades ahead world food markets could perhaps be transformed by technology. If new technologies allow countries with a lot of remote, under-developed, or “unconventional” farmland – like Kazakstan, Russia, Brazil, Australia, Africa, etc.. – to become major grain exporters for the first time, or if it allows countries with little farmland but a lot of capital – like Germany, Japan, South Korea, etc.. – to become larger grain exporters, then countries that have historically dominated global grain exports, like the US (along with Canada) and Argentina (along with Paraguay and Uruguay), could find themselves in a much more diverse global food marketplace. If more countries turn in to major food exporters (which in fact did happen during the decade of the 2000’s, for instance with the quadrupling of Brazilian soybean exports, which led to increased Argentinian-Brazilian economic competition), it could potentially reduce the level of competition between Argentina and the US.

7. Bridging the Andes

Argentina and Chile are the second and fourth largest economies in South America and the 48th and 50th richest countries in the world in terms of their per capita nominal GDP. They both speak Spanish, and they share a land border that is more than 5000 km long, the third longest border between any two countries in the world. Argentina’s capital of Buenos Aires is only 900 km from Chile’s capital of Santiago, while Argentina’s fourth largest city, Mendoza, is just 150 km from Santiago.

In contrast, Santiago is 2500-3000 km from Sao Paolo (Brazil’s largest city by far), Rio de Jaenaro (Brazil’s second largest city by far), or Lima (Peru’s largest city, and the second largest city in South America). It is 1400-1800 km from the largest cities of Paraguay and Bolivia, and 4200-4800 km from the largest cities of Colombia and Venezeula. In addition to their physical proximity, both Argentina and Chile could also potentially use one another as very significant short-cuts in order to access the Pacific Ocean (for Argentina) or the Atlantic Ocean (for Chile).

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And yet, Argentina and Chile actually do not have all that much to do with one another.  There is some trade and travel between the two countries, but not nearly as much as one might think. The reason for this is that the Andes Mountains sit in between the two countries, and they are such a formidable barrier that, even today, there are no railways or all-season roads that cross them. The lack of railways between the two countries is especially significant, because Argentina and Chile mainly produce bulk goods like grains (for Argentina) and minerals (for Chile), neither of which can be transported long distances efficiently by truck in most cases.

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In the future it might be that Argentina and Chile will overcome the Andes, whether through a tunnel with a railway through it (which they are hoping to finally build within the next decade), or by air travel becoming cheaper (whether passenger flights or cargo flights), or by more reliable mountain roads being constructed and maintained, or by cyberspace becoming more important, or by gas pipelines (which already exist — see map below) exporting more of Argentina’s natural gas to Chile’s gas-hungry economy. If this were to happen, the two countries might form a very close relationship. Though it is not likely to result in their fusing to become a single country, the future synergy between Chile and Argentina (Chargentina?) might become extremely significant.

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This could have an affect on US-Argentina relations, for several reasons. First, the US could see Argentina-Chilean cooperation as being worhty of political engaegement, since a connection with Chile could help Argentina to more successfully ensure that Brazil never becomes a great global power. Second, a railway linking Chile to Argentina could do a lot to help boost trade between Argentina and the US West Coast. From Chile’s northern commercial port of Antofogasta to Las Angeles by sea, for example, is less than half the distance from Argentina’s northern port of Buenos Aires to Las Angeles via the Panama Canal. Antofagasta to Las Angeles is even shorter than from Buenos Aires to Miami.

Lastly, a connection between Argentina and Chile could create an indirect connection between Argentina and the US. This is because the Chilean economy is much more closely integrated with the US economy than Argentina is. Whereas in Argentina trade with the US only accounts for about 8 percent of total Argentinian trade, and Argentina’s total trade only accounts for about 25 percent of Argentina’s GDP, in Chile trade with the US accounts for about 16 percent of total Chilean trade, and Chile’s total trade accounts for an estimated 56 percent of Chile’s GDP. In other words, Chile’s trade with the US relative to the size of its GDP is more than four times as large as Argentina’s is.

Even leaving Chile aside, Argentina could also find the Andes Mountains less imposing in the future because of the completion of the large expansion to the Panama Canal, which is expected to finally be complete (after having been delayed several times) in 2016. The expansion is supposed to allow ships carrying up to arount 13,000 containers to use the canal, up from around 5000 containers today. The expansion could help Argentina access the US West Coast, and could help Pacific Latin American countries, like Chile, Peru, Ecuador, and El Salvador, access the eastern half of the US. Similarly, improvements in the overland intermodal transport networks of countries like the US, Mexico, Panama, or Costa Rica could help in trade between the two sides of the American continent, which could have both a direct and an indirect positive influence on US-Argentinian trade.

8. The Falkland Islands

In 1982, Argentina invaded the Falkland Islands (which it calls the Malvinas Islands), prompting a war with Britain, which successfully counter-invaded the islands. Around 900 people were killed. Though certain elements of the US government (including, arguably, then-president Reagan) were sympathetic to the Argentinians claim on the islands, the US ultimately supported Britain in the war, hurting US-Argentine relations.

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Today the Falklands is still a tense issue in British-Argentinian relations. However, as the population of Britain is now another generation removed from its grand imperial past (remember, even as late as the 1970’s Britain still formally had a pretty huge empire), and as Argentina is no longer ruled by an intensley right-wing military junta as it was in the late 1970s and early 1980s when the war occured, and as the Falklands/Malvinas Islands are only home to fewer than three thousand people to begin with, it seems possible that it will become less and less problematic of an issue going forward.

If Britain and Argentina can finally manage to sort out the Islands issue, it might help to boost US-Argentina relations. In fact, even if Argentina and Britain cannot sort out the issue without another conflict, US-Argentinian relations could perhaps improve if the Argentinians become pleasantly surprised by US neutrality (or perhaps even outright support for Argentina) in any future spat (or war) over the islands.

9. The Antarctic Connection 

World maps tend to be somewhat misleading, since they often tend to make areas nearer to the north and south poles – like Greenland, for example – a lot larger than they actually are in the real world. This stretching applies to Argentina too, since Buenos Aires is acually located further south than Cape Town in South Africa or Sydney in Australia. The southernmost provinces of Argentina are about 2000 km further south than Africa or Australia, in fact, and they are several hundred km south of southern New Zealand. A similar thing is true of Chile: Santiago is situated at roughly the same latutide as Buenos Aires is, and southern Chile extends about as far south as southern Argentina does.

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One of the effects of this is that the distance between Argentina and the other southernmost countries in the world, namely Australia, South Africa, especially New Zealand, can be a lot less than it appears. Looking at a two-dimensional map, for instance, one would probably assume that northern Argentina is a lot closer to South Africa than southern Argentina is. But in fact, southern Argentina is actually slightly closer to South Africa than northern Argentina is. Both are only around 7000 km from South Africa, which means that by sea Argentina is actually closer to South Africa than Argentina is to Venezuela or Colombia. Indeed, from southern Argentina to South Africa is more than twice as close by sea as is the distance between southern Argentina and Europe.

Similarly, even though New Zealand is often considered a part of Asia, the distance by air from Buenos Aires to central New Zealand is actually about the exact same as from central New Zealand to Shanghai, while the flight from southern Argentina to southern New Zealand is about 1.5 shorter than from New Zealand to Beijing. The flight from Melbourne or Sydney in Australia to Buenos Aires, meanwhile, is only about 1.5 times further than from Melbourne or Sydney to Shanghai, and is around the same as from Melbourne or Sydney to Mumbai. Sydney is around 9000 km from southern Argentina by air, whereas New York City is around 1600 km from Sydney by air.

Thus, anything that would reduce air cargo costs and the safety costs associated with flying over the Antarctic ice could be significant in increasing the interactivity between these Antarctic-region countries. In fact, the most direct route between Argentina and western Australia is by flying basically over the South Pole itself. Even by sea, however, by rounding the southern cape of South America, Buenos Aires is about as close to New Zealand as New Zealand is from Shanghai (and quite a bit closer than to Beijing or Seoul), and Buenos Aires is only about 1.5 times further from Australia as Australia is from Shanghai.

If Argentina becomes much closer than it is today to South Africa, Australia, and New Zealand – each a significant member of the global “Anglosphere” – it could perhaps help bring Argentina indirectly closer to the United States. In addition, and perhaps even more importantly, the US continues to have some very significant strategic military interests in various parts of the region around Antarctica: in particular, the US navy wants to ensure that it continues to have access to the route around the southern cape of Argentina and Chile, since its aircraft carriers are too large to pass through the Panama Canal or the Northwest Passage to move between the Pacific and Atlantic Oceans.

There are some other reasons to think that Argentina might become somewhat more closely entwined with these countries. In the case of South Africa, most of Argentina’s exports (which are mostly of food) pass directly by its shores on their way to food importing nations in the Arab world and southern Asia. In addition, South Africa’s chief regional rival is Angola, a Portuguese-speaking country that was often the world’s fastest growing economy during the past decade or so, and which has potential pan-Portuguese ties with Argentina’s potential rival, Brazil (and to a lesser extent with Mozambique, which is South Africa’s most populous next-door neighbour by far). It is not unthinkable that a South Africa-Argentina relationship would form to counter a Brazil-Angola one.

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Argentina could also potentially become closer with South Africa and Australia if Argentina finally uses its wealth to develop a large industrial base, since South Africa and Australia are both huge exporter of various minerals. Or, if Argentina finally mends its relationship with Britain over the Falklands; during the Falklands war, for example, even then-apartheid-era South Africa cut off diplomatic ties with Argentina, and did not resume them for nearly a decade. Also, if Australia’s severe water shortage risks eventually turn it from a net exporter of grains to a major net importer of grains, it could lead to a much larger trade relationship between the two countries.

Finally, because of the relative proximity between areas of the Antarctic region, if the southern halves of Argentina and southern Chile could be developed economically on a significant scale for the first time, perhaps through the use of new technologies like water desalination (southern Argentina is arid), wind power (southern Argentina is one of the windiest places on the planet), machine-intensive development (southern Argentina lacks a significant labour force because it is sparsely populated, but it is also resource rich), or cheaper air travel (southern Argentina and Chile have huge tourist potential, yet are very remote, and in many cases are also highly mountainous and archipelagic), it might have a positive influence on their economic interaction with fellow Antarctic-region economies in South Africa, southern Australia, and New Zealand.

10. Political Convergences

Earlier we talked about how Argentina’s and the United States’ geo-economic and political systems are in a certain sense complete opposites of one another, with Argentina being highly centralized around northern Argentina in general and Buenos Aires in particular, and with the US being extraordinarily diffuse by comparison. However, this could be changing in both countries, because of technology. In the US, technology may be serving to bring the country’s disparate regions closer together – as communication has already become easy because of the Internet, and travel could perhaps become much easier in the future as well. Technology might allow the US to overcome its de-centralized geography to become somewhat more centralized, in other words.

In Argentina, conversely, technology could perhaps allow the country to overcome its centralized geography to become somewhat more de-centralized, if, for example, it empowers Argentinian individuals, businesses, or other groups, allows northern Argentina to become somewhat less dependent on Buenos Aires, or allows for the development of regions – such as the Andes regions and southern Argentina – that in the past have not had significant economies. If technology allows the US to become more centralized and Argentina less centralized, the two countries might start to have more in common in terms of political culture. In turn, this could perhaps help them finally become closer to one another.

 

Ramblings on regional Canadian Politics

(Disclaimer: this article is more or less a rambling thought-experiment, and should not be taken as a concrete prediction of Canada’s future)

The province of Ontario has long been the most dominant force in Canadian politics. Though it has never been powerful enough to simply impose its will on the rest of the country, neither has the rest of the country been powerful or united enough to sidestep its interests. Ontario’s strength rests on six pillars:

It has the largest economy, with an estimated 37% of Canada’s GDP, compared to just 19.5% for Quebec, 17% for Alberta, 12% for British Colombia, and 4% for Saskatchewan.

It has the largest population, 39% of the Canadian total. By contrast, Alberta, despite having 17% of Canadian GDP, only has 11% of Canada’s  population.

It has by far the largest commercial relationship with Quebec, nearly 8 times as large as any other province has.

It has the largest commercial relationship with Alberta, 1.5 times greater than BC’s relationship with Alberta.

It is tied with Alberta for having the largest commercial relationship with British Colombia.

It is the least dependent on inter-provincial trade: it conducts 2.5 times more trade with other countries than it does with other provinces, compared to just 1 – 1.5 times more for Quebec, Alberta, and British Colombia.

A number of these pillars could be undermined in the near future. First, Ontario’s economic size advantage could be cut into by either or both British Columbia and the three Prairie provinces (Alberta, Saskatchewan, and Manitoba). The Prairies will continue to grow if commodity prices continue to rise, since they depend heavily on exporting energy, food, and other natural resources like potash and iron ore. (Of course, the reverse is also true: if commodity prices drop, their economies might shrink relative to Ontario’s). Already the commodity price boom that began in 2002 has boosted the Prairies’ output from 19 to 24% of Canadian GDP, helping to push Ontario’s share down from 42% to 37%.

British Columbia, meanwhile, may outperform Ontario over time for a number of different reasons. For example, BC may benefit more than other provinces from continued economic growth in Asia. BC has the largest proportion of Asian inhabitants of any Canadian province: approximately 25% of BC’s population is of East Asian or South Asian origin, compared to around 17% of Ontario’s, 10% of Alberta’s, and just 3-6% of Quebec’s. An estimated 11% of BC’s population is of Chinese origin in particular, compared to just 5.5% of Ontario’s population, 4.5% of Alberta’s, and 1.3% of Quebec’s.

Much of BC’s Asian population is comprised of bilingual second-generation immigrants who, with a median age of roughly 15 years old, are only just on the cusp of participating in BC’s workforce. BC also has the shortest and cheapest time shipping back and forth between Asia, since, unlike in most other Canadian provinces, doing so does not require two roundabout trips through the far-away, busy Panama Canal. Asia’s economic growth has already helped BC to maintain its share of Canada’s GDP over the past decade, in contrast to Ontario which has seen its share of Canada’s GDP shrink.

Other factors also bode well for BC’s long-term growth prospects. British Colombia has long been the most physically isolated province in Canada, apart from Newfoundland. Not only is BC situated far away from Canada’s largest economies of Ontario and Quebec, but it is also far from those of the eastern half of the United States, where a large majority of Americans live. It is even far from Las Angeles and San Francisco. As such, British Columbia may benefit more than other parts of Canada from globalizing forces like the spread of digital technology and cheaper air travel or shipping, which help to overcome the limitations of physical distance.

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To some extent this has already begun to occur. BC has booming film and video game production industries, for example, and regularly attracts tourists from as far away as Australia. BC may continue to benefit from this type of thing in the future, if and as globalization deepens. Given its unique combination of warm weather (by Canadian standards), beaches, mountains, and rare temperate-climate rain forests, the increased accessibility that may be provided by globalization could be a serious boon for the British Columbian economy.

BC has also been limited in the past by the relatively low – and falling of late – cost of natural gas and electricity in North America. BC accounts for more than 25 percent of Canada’s natural gas production (and Canada is the world’s 4th largest gas producer), and it also has a huge amount of shale gas and hydroelectric potential. However, because natural gas and electricity cannot cheaply be exported long distances, or across the Rocky Mountains, or by ship to other continents like oil and coal can, BC has not profited from energy resources to nearly the same extent as its super-rich neighbours in Alberta and Saskatchewan have.

BC had recently hoped to get in the LNG (liquified natural gas) exporting game, and is still likely to do so; however, the shale revolution that has provided US states like Texas with huge gains in natural gas production will probably make such exports far less profitable than they otherwise would have been. The US not only has a glut of natural gas right now, but also has a huge lead on the extremely expensive infrastructure required to liquify and export natural gas overseas, since it is much cheaper to convert LNG import terminals (which Texas and other US states already have a lot of, but which no Canadian province apart from New Brunswick has) into export terminals than it is to build LNG export terminals from scratch.

Over the longer term, however, BC may benefit from new labour-saving technologies that move global manufacturing back from countries that have cheap labour to those which have cheap energy and capital. If, in other words, industrial mechanization technologies reach the next level of sophistication, manufacturing could flood back into North America, causing the price of North American electricity and natural gas to rise. This would be very helpful to the BC economy, not only because BC has an abundance of energy, but also because its lack of non-mountainous land has limited the size of its population, which has caused its labour costs to be relatively high. BC hydroelectric and natural gas production (and wind power, which BC has an enormous potential for as well) could also benefit from any regional, continental, or global effort to safeguard the environment by reducing dirtier oil and coal consumption.

While the economies of BC and/or the Prairies grow faster than Ontario’s, Alberta and BC are also likely to begin trading much more with one another than they currently do. Today, most of the goods produced in Alberta are either consumed in Alberta or exported to Ontario or the United States. The emergence of Asia’s economies, however, may lead Alberta to send a greater share of its energy and food exports westward to the Pacific, via BC. Already Asia accounts for around 40% of the world’s imports of oil, 70% of the world’s imports of liquefied natural gas, and more than half of the world’s imports of food, even as its per capita gdp is still only around $6000. If Asia continues to grow, so too will Alberta’s reliance on British Columbian roads, railways, and ports.

The shale oil industry that emerged in the United States during the past few years might also lead Alberta to send more of its exports westward to BC. Producing shale oil releases enormous amounts of natural gas from the earth as a by-product, such that American natural gas production has risen by more than 25% since 2008. Unlike oil, natural gas cannot be shipped cheaply overseas; only 7% of the world’s natural gas is transported via ship, compared to more than 50% percent of the world’s oil. As a result, Americans have begun looking to export gas to Mexico and Canada by way of overland pipelines.

Mexico’s imports of natural gas from Texas, which already doubled between 2010 and 2013, are expected to double again during the next few years. Ontario (and perhaps Quebec), similarly, can expect to see big increases in imports from US states within the Marcellus shale basin, such as Pennsylvania and West Virginia. The Marcellus basin has seen by far the largest and most rapid increase in gas production in the United States of late; Pennsylvania alone has become the third largest American shale gas producer by raising its output by more than 300% since 2011.

The Utica basin, meanwhile, which is located in states like Ohio and Michigan, has seen enormous increases in gas production during the past year as well. This may continue, particularly if New York state ends its ban on natural gas fracking. And, crucially, pipeline infrastructure between Ontario and this part of the US is already in place, since in previous decades Ontario used to export Albertan gas to American states on its borders. There are ten gas pipelines linking Ontario to the US; by comparison, British Columbia and Quebec together only have five gas pipelines that connect to the US.

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Just as Alberta finds its gas markets in Ontario and Quebec squeezed by closer-by production in eastern American states like Pennsylvania, it will also face a greater level of competition in US markets as a result of shale production in nearby states like North Dakota. Almost all of the Prairies’ exports of energy and food to American markets travel by way of pipelines or trains that pass through North Dakota. North Dakota has already increased its production of energy by more than 500% since 2007, so these trains and pipelines are now much more expensive to use. Indeed, due to a shortage of oil pipelines, the share of North Dakotan oil that is transported via train has risen from roughly 20% to 75% in the past six years, nearly overwhelming the state’s rail network.

Finally, the shale boom in the Gulf states of Texas and Louisiana, the first and third largest energy producers in the United States, combined with economic development in Mexico and the Caribbean, is making the use of Gulf of Mexico’s ports and refineries much more competitive than they have been in the past. This matters to Alberta, since much of Alberta’s oil was supposed to have been refined in the Gulf region. Now, however, many of the Gulf’s refineries might begin to be retrofitted to refine the ultra-light oil released from shale instead of heavier types that Alberta and Venezuela produce.

Alberta and the other Prairie provinces are also affected by this because their exports of food, coal, and some other resources are usually shipped to global markets via ports in the Gulf of Mexico (after being trained through North Dakota and then barged down the Mississippi River), such as the ports of New Orleans and Houston, both of which handle more cargo in terms of sheer tonnage than any other port in the United States. As a result, Alberta and Saskatchewan may soon have to rely more heavily on BC, where there will be far less competition from American shale energy, and where more export facilities will be built to transport fossil fuels, food, and other commodities to Asian markets.

Quebec too is likely to degrade its economic relationship with Ontario. Quebec has the most rapidly aging population of any major Canadian province, and so may soon face challenges in producing or consuming enough to keep its economy growing at a pace it is satisfied with. This challenge is compounded by Quebec’s feeling of cultural insecurity and lack of control over its borders, since not only is Quebec relatively wary of immigrants, but any immigrants it does bring in can always choose to go live in other parts of Canada that are wealthier, warmer, and more welcoming.

One of Quebec’s solutions to this problem will be to attract French-speaking immigrants from nearby Haiti and from northern and western Africa. In turn, these immigrants will create economic relationships between Quebec and their native countries. Indeed, with a large wave of second-generation immigrants in Quebec coming of age during the next decade, this process may soon begin to accelerate with or without further immigration. Already Quebec`s most common foreign languages are Arabic, Spanish, Italian, and Portuguese, in contrast to most of the rest of Canada where they are Punjabi, Cantonese, Mandarin, and Tagalog.

Quebec will also use the introduction of the internet in the developing world to interact much more with these countries, in areas like media, banking, and software development. The internet might also allow Quebec to engage increasingly with France, which is still the world’s fifth largest economy and has the youngest population of any large country in Europe. To get an idea of just how significant Quebec’s linguistic affinities might soon become, consider that even today Quebec`s largest foreign trade partner apart from the US and China is Algeria, an Arabic country in North Africa that is only so-so at speaking French.  Unlike other Canadian provinces, Quebec has chosen to import much of its oil from Algeria. This is particularly noteworthy given that oil is not even an industry in which speaking the same language would seem all that important. If Quebec can let such ties influence its oil purchases, imagine what its future might be in industries where language actually matters.

Quebec could perhaps also find that globalization will give it greater affinities with Romance economies like Latin America, Italy, Spain, Romania, and Angola. It is, after all, far easier for a  speaker of Spanish or Italian to learn to get by in French than it is for an English speaker to do so. Plus, Latin America speaks English less than almost every other part of the world, so there may be less competition there for French speakers than would otherwise be the case. As a result, Quebec’s commercial patterns are even more likely to diverge from those of Ontario. This is because Ontario’s focus in a globalizing world will probably be oriented more towards the places its immigrants are from, such as China, South Asia, and the Philippines, as well as towards English-speaking economies like the United States, Britain, Australia, Jamaica, Nigeria, South Africa, and Singapore.

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Finally, the Atlantic Maritime provinces of Nova Scotia, New Brunswick, Newfoundland and Labrador, and Prince Edward Island could become better integrated with one another than they are today, and better integrated with the economies of western Canada, Quebec, Europe, and the Northeastern United States than they are today.

Today the Maritimes are, to a certain extent, divided from one another by the ocean. Both Newfoundland and Prince Edward Island are islands (though PEI was connected to the rest of Canada by a 13-km long bridge in 1997), while Nova Scotia, the most populous Maritime province, is a peninsula with a large island, Cape Breton, on its northern edge. To drive, for example, from Halifax (the largest city in the Maritimes) or Yarmouth (on the southern tip of Nova Scotia) to Fredericton or Saint John in New Brunswick can be about 350 – 600 km, even though flying is only around 150 – 250 km. To drive from Halifax to Charlottetown on Prince Edward Island is 285 km, but only a 175 km flight. And St Johns on the island of Newfoundland is about a 900 km flight from Halifax or Fredericton. As a result, if short-distance airplane costs become cheaper, it could help the Maritime provinces to become better integrated with one another.

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A similar thing is true of the Maritimes’ relationship with Quebec and with the Northeastern United States. Currently it is 550 km drive from Saint John, New Brunswick (a province where about a third of people speak French) to Quebec City and a 790 km drive from Saint John to Montreal. If, however, the American state of Maine builds an east-west highway, those numbers could drop to around 400 – 550 km. (This would also shorten the drive between the Maritimes to Toronto, Ontario, but that would still remain over 1000 km long). Meanwhile, cities like Halifax and Yarmouth are about 1000 – 1400 km away from  from Boston and New York City by road, but only 450 – 950 km from them via airplane.

Commercial ties between Quebec and the Maritimes could also deepen as a result of the development of areas in northern Quebec and Newfoundland’s mainland territory of Labrador, which share a land border with one another that is over 2000 km long (see map above). These areas have been too remote to populate in the past, but over time it is possible that they will become less remote, or that the development of their natural resource sectors – which have a great deal of potential – will be realized with fewer humans and more machines.

In recent years, the Maritimes have been becoming much better integrated with the Canadian Prairies, as large numbers of young people from the Maritimes have moved to oil-rich cities like Edmonton and Fort McMurray to find employment. This trend may continue in the future (though, if oil prices fall, it may also be reversed), and, if globalization deepens, so too might the general trend of the Maritimes being able to interact with faraway western Canadian provinces that in the past they have had relatively little to do with. It is, by the way, almost 5000 km from Halifax to Vancouver via land, and more than 11,000 km to ship goods between Halifax and Vancouver by way of the Panama Canal.

Finally, the economy of the Maritimes could become better integrated with Europe. The Maritimes tend to have closer ties of identity to Europe than other Canadian provinces do, and  they also have a decent-sized French-speaking population that might increasingly interact with France as a result of globalization. The Maritimes are, in fact, located closer to Europe than they are to the Canadian Prairies.

Perhaps most importantly, it is possible that the Maritimes will begin exporting significant quantities of natural resources – particularly oil from Newfoundland, but potentially also liquified natural gas from New Brunswick, as well as other commodities  – to European economies. Newfoundland today accounts for around 17 percent of Canadian oil production, most of which is exported to the US or other Canadian provinces. However, as the US and other Canadian provinces have increased their oil supply in recent years as a result of shale energy and the Albertan oil sands, Newfoundland has been looking further abroad for customers. Europe would seem like a natural fit; not only is it relatively nearby, but it is also increasingly in search of energy imports, given that its traditional energy suppliers in Russia and the Middle East have been consuming a growing share of their oil and gas instead of exporting it, and exporting a growing share of their oil and gas to India and Asia instead of to Europe.

The relationship between Newfoundland and Britain could become particularly interesting. In the past, Britain has not been an oil importing economy, but instead produced its own oil from the North Sea. In the past few years, however, British oil production in the North Sea has been dropping very quickly, forcing the British to become net oil importers for the first time in a long time. Britain still only imports a relatively small amount of oil, but if North Sea energy production continues to fall  (as many believe it will, not only in British waters, but also in Norwegian, Dutch, and Danish ones) Britain could quickly become one of the world’s largest oil importers. Especially given the historical ties between Britain and Newfoundland – as recently as 1948, 14 percent of Newfoundlanders voted to essentially continue being part of Britain, and 45 percent voted to be independent rather than join Canada –  this could potentially help create close economic ties between the two.

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To sum up, Ontario`s economy could be likely to shrink compared to BC and/or the Prairies and become relatively less integrated with Quebec and Alberta, at the same time as the economies of Alberta and BC become much better integrated with one another and the Atlantic Maritime economies become better integrated with Europe, with Quebec, with one another, and possibly with western Canada. As a result, it is not impossible to imagine that Ontario’s dominant position in Canadian politics could largely disappear, possibly even within a fairly short period of time.

If this were to occur, Canadian unity might be forced to rely much more heavily on sentiments of national identity than it does today. This could be problematic, as provincial economic interests (and environmental interests) may in many cases run counter to one another. It might force parts of the country to have to decide between economic development and national cohesion.

With potentially divergent economic interests, and with each individual major province already conducting an average of around 1.7 times more of its trade outside of Canada than with other provinces, and with the continued existence of Quebecois nationalism, Canadian political unity could become strained, perhaps to the point of provinces or regions becoming effectively or even formally independent. I am certainly not predicting that this will happen – I am a Canadian, so I know firsthand that Canada’s sense of national identity is relatively strong – but I would also not rule it out entirely, given the factors discussed above.

On the bright side, if the Canadian state really was ever to dissolve, it could make for some really interesting hockey tournaments at future Winter Olympics.

8 Reasons Canadian Home Prices Might Fall

Canadian home prices have risen by more than 35% since 2006, while American home prices have declined by more than 10%.  This has been great for Canadian homeowners and for investors in the Canadian real estate market. It has, however, also terrified many Canadians, causing them to wonder whether it is only a matter of time until Canadian home prices fall just like those in the United States. They are right to be worried: there are a number of reasons to think that home prices in Canada’s major cities could fall sharply during the decade ahead.

1. Demographics

Today the typical Canadian is between 50 and 57 years old. In the next decade many will retire, and so will no longer need to base their housing decisions on job considerations. Many will want money to do things like travel, go out to restaurants more often, escape a month or two of the Canadian winter, buy or renovate a family cottage, save up for their approaching old age, pay for care for their elderly parents, and help their grown-up children to establish themselves financially.

At the same time, there is a large drop-off in the Canadian population below the age of 15. This means that the next ten years will see Canada’s youngest large age cohort – currently aged 15 to 20 – go from living with their parents to renting out a room or apartment on their own or living abroad. As a result, the typical Canadian will have an empty nest for the first time in the coming decade. They may therefore be tempted to downsize their homes in order to gain access to cash. This could be particularly true of divorced parents – and approximately 40% percent of Canadian marriages end in divorce – some of whom might have only kept a house in the first place because of their kids. Meanwhile, most 20 year olds living on their own for the first time will not be buying a home: the average age of buying a first residence in Canada is currently 29 years old, and is unlikely to decrease over the next decade because of the high youth unemployment levels that have existed since the recession of 2008.

Certainly Canadians will not need large houses to host family dinners: the Baby Boomers are expected to have only around three grandchildren on average, compared to four or five grandchildren for the generation that preceded them and six grandchildren for the generation their parents were a part of. An entire three-generation family – which by 2020 will typically be made up of two grandparents, one or two children, one or two children-in-law, and three grandchildren, for an average of just 5 adults and 3 youths – will in most cases fit comfortably around a single dinner table. This will make many Baby Boomers less hesitant to downsize their house in order to play host for the whole family.

Unless elderly Canadians begin to hold on to their homes for far longer than they ever have in the past (which, admittedly, could happen), demographic trends do not seem to be working in favour of the Canadian housing market. This is in sharp contrast to the United States, which has a significantly younger population.

2. The United States

When Canadians leave Canada, it is overwhelmingly to go to the United States. Approximately one million Canadians now live in the US, compared to just 70,000 Canadians living in Britain. There is a similar number of Americans who live in Canada, making the American population in Canada larger (not to mention wealthier) than any other national minority group. With the American economy having outgrown the Canadian economy by a significant amount during the past four years (after having grown quite a bit slower than Canada between 2007 and 2012), and with American housing prices having become much cheaper relative to Canadian ones than they were prior to the financial crisis of 2007, the United States could have a negative effect on Canadian real estate prices over the long term, if more Canadians are willing and able to move south and if fewer Americans are tempted to move north.

3. China

China has accounted for more than 20% of the world’s official economic growth since 2003. Over the next few years, however, it seems that China’s growth rate is likely to slow down, for a number of reasons including that the Chinese workforce is now much older and more expensive to employ than the workforces of most other countries in Asia. As it turns out, a Chinese slowdown could have a significant impact on Canadian real estate prices.

Canadian cities have been among the favorite places for Chinese to invest in, which is not such a surprise given that Canada has the world’s third largest Chinese population of any developed economy, behind only Singapore and the United States and close to double that of the next largest, Australia. The United States’ Chinese population is actually only around 2.5 times larger than Canada’s is, even as the total US population is almost ten times that of Canada’s total population. Of Chinese university students studying abroad, meanwhile, an estimated 12% are in Canada, trailing only the US (32%), Britain (17%), and Australia (13%), and far ahead of fourth-place Singapore (4%). China also finds investing in Canada useful because of Canadian natural resources: overall Chinese investment in Canada between 2005 and 2012 was roughly $35 billion, trailing only the US and Australia (both around $50 billion) and $10 billion more than the next largest, Brazil. As a result, a Chinese slowdown would arguably damage the Canadian real estate market.

4. Energy

Because China’s economy is based primarily around manufacturing and construction, its rise in the past decade helped to cause the biggest boom in commodity prices since the Second World War. The prices of electricity, oil, and natural gas soared. This has helped to keep housing prices high inside cities, since suburban sprawl is dependent on cheap gasoline for commuting, driving, shipping goods, plowing roads, mowing lawns and parks and golf courses, and moving around machines used in road maintenance and the construction of houses and roads — and it is  dependent on cheap electricity to light and air condition large suburban homes, cars, malls, and superstores, and on natural gas to heat them.

In Canada, higher energy prices also mean higher export revenues, which in turn means a stronger economy in general. To a much lesser extent, a similar thing is true of the cost of wood, which is also an input cost of the housing market as well as a significant Canadian export.

There is, not surprisingly, a strong historical correlation between oil and Canadian  real estate prices.  When oil prices reached their  modern-day lows during the mid-1990’s, Canadian home prices declined by roughly 5% in spite of rapid growth occurring in the general economy at the time. When oil prices reached their modern-day highs between 1979 – 1983 and 2008 – 2013, on the other hand, Canadian home prices went up by roughly 10% and 35%, respectively, even though the country’s two worst postwar recessions took place during 1982 and 2009.

Today, many people expect North American energy prices to fall, or at the very least not to rise rapidly in the way they did between 2003 and 2007. Looking at the futures market (financial markets in which people bet on what the price of something will be at some designated future time) you can see that the expectation is that the price of oil – from which nearly all gasoline is derived – will decline from around $105 a barrel today to $92 by April 2015, $84 by April 2016, $80 by April 2017, and $77 by April 2018 (Update: crude oil prices have dropped to $45 a barrel during January of 2015.) Natural gas prices in North America are not expected to rise during the next five years either. If the markets are correct about these prices, North American energy will become cheaper in the near future.

In addition to its affects on suburban development, cheaper energy also means cheaper airplane travel. For Canadians, this could make buying a place in a warm climate outside of the country more appealing. It could also let the Canadian population disperse itself more widely throughout its vast territories during the spring, summer, and fall. Most Canadian environments are not easily accessible by road, whether because of their ruggedness (particularly the Rocky Mountains, which cover almost all of British Colombia and parts of Alberta), or the fact that they are covered by incredibly dense clusters of rocks, lakes, and forests (particularly the Canadian Shield, which covers more than half of Canadian territory). Cheaper air travel could perhaps help to open up some of these enormous territories to development, which could hurt land prices within major Canadian cities, at least relative to those of smaller Canadian cities and the Canadian countryside.

5.          The Internet

The recent and ongoing spread of high-end smartphones and tablets in the developed world and of low-end smartphones, computers, and internet access in the developing world, and the fact that many of even the least tech-savvy Baby Boomers are now getting into the internet in a big way, means that at this very moment we may be smack-dab in the middle of the Internet Revolution, one of the defining events of our time. And it seems possible that, as cyberspace increases, real space – including real estate – could become less precious.  So, what effects might the Internet Revolution have on home prices in Canadian cities?

E-commerce, which has already increased massively in recent years, probably is not even close to as ubiquitous as it will become in the years ahead. The Internet and computer software have the potential to assist or replace a huge range of businesses. Books, e-books, furniture, household supplies, clothing, computers, bank withdrawals, and even groceries and pharmaceuticals can and increasingly are being ordered online. Coffee shops have already practically morphed into office spaces.

Changes such as these can allow people to work and shop from homes, offices, shared working spaces, or warehouses in places outside of the downtown core of major cities, or even outside of cities altogether. In turn, this may allow for some prime commercial real estate – for example, a skyscraper with thousands of offices in it, or an Ikea or Walmart with a large parking lot – to be converted into residential properties. To give just one example of this, it was announced last month that the US Bank Tower in Los Angeles, the largest American skyscraper west of Chicago, will soon be converted into a residential property because it failed to fill more than half of its office space in recent years.

Computer technology offers the possibility of outsourcing huge numbers of jobs that in the past could not have been outsourced. Not only do computers allow for  interaction between rich and poor countries, they also allow people living in the developing world to receive an education more cheaply and easily. Computers may also help lead many jobs to become automated by software or machines. More outsourcing and automation could reduce Canada’s appetite for immigration, which, because most immigrants come to Canada in their late 20’s or 30’s, would mean there would be fewer adults around  to rent or purchase homes.

The Internet also allows people to live in suburbia, cottages, winter homes outside of the country, or small cities or towns more easily. This is because it can help people to work or study online, and because it can help people deal with the stuck-in-the-middle-of-nowhere feeling that has often made people feel cooped up or unsafe living in the countryside. It also makes it easier for people living in suburbia, towns, or rural areas to get from one place to another more easily and cheaply, by allowing people to do things like:

-create far more flexible, reliable, and efficient “smart” transportation systems, whether public or private

– use their computer devices to see exactly when buses or trains are coming

– see precisely what traffic and road construction is like on any given route

-have goods delivered quickly and directly to their house after having bought them over the internet

-coordinate snow plowing and de-icing in rural areas during the winter, so that areas far off the beaten track can be accessible by car or truck rather than by snowmobile on certain days

– access emergency health care, both via webcam and by making it easier for rapid response teams to find the house they are going to if they have to find their way in the dark

-find friends or strangers nearby that are looking to go to the same place as they are so that they can carpool or share a taxi with them. (Update: Uber now exists). 

-get work done or, read, or watch a video when using public transportation or carpooling

-use an app that automatically allows them to split gasoline costs or cab fare when they are carpooling or sharing a cab with other people

-avoid getting lost or stuck in bad weather when driving through the dark countryside at night

-look online to find homes or apartments to rent

-work from home during part of the day or part of the week in order to avoid commuting during rush hour or when the weather makes road conditions poor

For those who doubt how impactful changes such as these could be, I would keep in mind three things. First, that the “smartphone revolution” is still incredibly new; its potential to affect things like transportation and health care has barely been felt so far, but probably will before long. Second, even now, imagine how much easier it would be to live in the countryside than it would have been in, say, 1975 or 1995, before these technological revolutions took place. And third, consider how little of Canada’s territory is accessible by road at the moment. Canada only has around 15-20 thousand km of highways, in a country that occupies nearly ten million square km. There is still a ton of room to spread out in, in other words. This is true even in the southern areas of the country; for example, the population density of the southernmost 15% of Ontario’s territory (see map below), an area including both Toronto and Ottawa, is approximately 80 people per square km, roughly a third of that of Germany or Britain.

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(Ottawa is not displayed on this map; the two main urban areas it shows are Toronto and Buffalo. Note, however, how small even the sprawling Greater Toronto Area is in comparison to the relatively small portion of Ontario’s territory shown in this picture)  

6. Cottages, Condos, and Capital Gains

Not only does Canada have a ton of land,  it is also home to more lakes than the rest of the world combined. A large number of these lakes, including all of the Great Lakes, are located within a manageable drive of Canada’s largest cities. This has given the country an enormous cottage industry. Cottage ownership is, in fact, the Canadian Dream.

Most Canadians still do not own a cottage, however. But many more soon might, as a result of several of the factors already mentioned above. Canada’s demographic trends support the cottage industry’s growth, for example, as people often buy cottages relatively late in life in anticipation of future grandchildren and to relax when they scale back their work hours prior to their retirement.

Being able to get work and other things done over the Internet could also boost cottage ownership, as could cheaper gasoline, less traffic, better public transport within cottage country, and the ability to use the Internet to more easily rent or share waterski, fishing, or sail boats, which many cottage owners cannot easily afford to buy, dock, maintain, and store during the winter. The Internet is also increasingly allowing cottage owners in Ontario and Quebec to earn income by using sites like Airbnb to rent out their cottages to Americans – who, since the recent fall in energy prices, also have a more powerful dollar to rent them with – since the northern US lacks the dense cluster of lakes that are found in the Canadian Shield.

This is significant, because Canadian tax law gives cottage owners less of an incentive to own an expensive city home. The Canadian government allows people to designate one of their properties as a “principle residence”, which lets them avoid declaring capital gains on their income taxes when the value of that home increases. This often saves people a huge amount of money.

Canadians who own cottages have the option of designating their cottage as their principle residence instead of their city home, however. In the past, this has not mattered much, since home prices have been rising so consistently that the capital gains on a home always far exceeded those on a cottage. Yet, if in the future cottage values begin to increase faster than city home values, Canadians with cottages that are relatively expensive could begin to save more from designating their cottage as their principle residence. In other words, Canadians who buy cottages – or renovate or winterize cottages they already own – will have less of a tax incentive to own a large city home. The same is true of winter vacation condos Canadians own in places like Florida. As such, many Canadians may become more inclined to downsize their city home, or to sell their city home and start renting out a home or apartment in the city instead.

7.    Conventional Real Estate Indicators

Most articles you will find discussing real estate prices will not look at many of the things we’ve discussed so far. Conventional economic analyses tend instead to focus on factors that are more technical and that impact the market in less roundabout ways than, for example, the way in which smartphone apps could alter home prices by reducing highway traffic.

Conventional real estate indicators include the ratio between a country’s average income and the price of its homes, the ratio between the price of homes and the cost of renting similar homes, the the yield curve of bonds (which indicate what the market predicts future interest rates will be, the idea being that lower interest rates facilitate higher home prices by making it easier to borrow money to buy a home or pay off a mortgage) and the ratio between household debt and income (since it is presumably more difficult for an indebted person to take out or pay off a mortgage).

It turns out,however, that there is little hope for Canadian homeowners to be found in these conventional indicators either. Canadian home prices are 8 times higher than Canadian incomes, a ratio greater than that of any developed economies apart from France or Belgium. Renting a home in a major Canadian city is an estimated 30 – 40 times cheaper than buying a similar home, a ratio greater than that of any developed economy apart from Norway. The ratio between Canadian incomes and household debt levels is higher than it has ever been in modern times; it is nearly one and a half times higher than it was as recently as 2001, one and a quarter times higher than it was in 2005, and higher than that of all but seven other developed economies.

Finally, the yield curve on Canadian government bonds suggests that the market expects Canadian interest rates to become one and a half times higher than they are today by the middle of 2016, and twice as high as they are today by the middle of 2017. This is a relatively sharp increase, considering that the same yield curve shows rates becoming just three and a half times as high as they are today between 2017 and 2044. Moreover, the yield curve does not have perfect foresight: interest rates will probably rise prior to 2016 if the economy grows faster than expected in 2014 and 2015. (Of course, the inverse is true as well: interest rates may be held lower for longer if the economy underperforms expectations).

8. Construction Costs 

Historically, apartment buildings and houses have been very expensive and time-consuming to build, even ignoring the cost of building materials. But this could change. Indeed, we may even see house-building robots before too long, capable of working 24-7, 365 days a year. (Oh, and check this out). Certainly we should be not surprised if construction labour costs decline going forward, as labour costs in general are being squeezed by both automation and outsourcing. In that case, why even take the chance? Unless you really need to, you might want to think twice about putting all of your money into urban real estate.

Top 10 Myths about the Global Economy

The 2000’s was a decade of rapid economic change. The Chinese economy grew enormously, and to a lesser extent so did the economies of Russia, Turkey, Saudi Arabia, Brazil, South Korea, India, and others. Mobile phones, smartphones, and the Internet changed the way billions of people live their lives and conduct business. Near the end of the decade there was a major shock to the global economy, dropping growth from about 4% between 2005 and 2007 to 1% between 2007 and 2009. The slowdown thrust millions of people into unemployment.

One of the byproducts of such speedy transformations has been confusion regarding the present configuration of the global economy. According to a 2011 Gallup poll, more than half of Americans believe that the world’s largest economy is China, whereas only thirty percent believe, rightly, that it is the United States. While some of the blame for ignorance of this kind should presumably go to the American education system and media, its root cause is probably just that the world has been changing so fast that people have not had the time to catch up to what is really going on.

With that in mind, in this article we have tried to compile the ten most widely held myths about the global economy. They are as follows:

1.      China Owns All Of America’s Debt

Contrary to popular belief, China only owns about 8 percent of American government debt and 2.7 percent of total American debt. This is not so unique: Japan, for example, owns 6 percent of American government debt, and England owns 2.5 percent of American government debt. China also does not receive as much leverage over the United States from these debt holdings as is commonly thought, because its economy is considerably more dependent on trade with the United States than the American economy is dependent on trade with China. China’s exports to the United States are equal in value to around 6% of China’s gdp, whereas American imports from China are equal in value to only around 1.8% of American gdp. Chinese leverage over the United States is also compromised by the fact that the United States military dominates the Indian and Pacific Oceans that China requires access to for nearly all of the imports and exports it depends on.

2.      China Will Soon Overtake the United States

For China’s economy to equal America’s even ten years from now it would have to grow at an average of 9 percent in real terms, assuming the economy of the United States would only continue at the relatively unimpressive rate of 2.5 percent per year it is currently growing at, and that exchange rates remain at their present rate. This would be a remarkable feat; in its entire mod­ern history China has only twice averaged an annual growth rate of more than 9 percent over the course of a decade, and no country in modern history has grown at an average of more than 10 percent over a period of five and a half decades, which China would accomplish if it  were to grow at such a pace over the next ten years. To say that China will definitely achieve such growth, therefore – when it is facing a huge number of challenges, including high commodity prices worldwide and slow growth among the Japanese and European consumers of its exports – is a bit of a reach. And of course it is also possible that the American economy will grow faster than it is expected to in the years ahead.

3.      America Doesn’t Make Anything Anymore

It has become popular to argue that the United States is becoming economically or even morally bankrupt because it no longer produces tangible goods, but instead focuses on service-sector industries like fast food and finance. The fact is, however, that America does produce tangible things: it still boasts the world’s first or second largest industrial sector (depending on which data you accept), even as the share of its GDP that the sector accounts for has shrunk significantly over the course of the past generation. America arguably manufactures more than China does, and it certainly manufactures far more than Japan and Germany do. In fact, because energy prices in the United States have recently become much cheaper than in Europe or Japan, the US may now also be able to grow its high-end manufacturing base faster than those of other large developed economies.

4.      2008 Was the Worst Recession Since The Great Depression

Okay, this myth may technically be true, perhaps. Still, by everyone constantly repeating it, the idea that 2008 was unprecedentedly similar to the Great Depression has been widely and wrongly perpetuated. The fact is that for most large economies – with the possible exceptions of Spain and Italy, and perhaps a few others – the 2008 crisis and the ongoing European crisis it spawned are actually more similar to the string of recessions that have occurred since the Great Depression than they are to the Depression itself.

Indeed, there might even be a case to be made that 2008 was the least painful of the major American economic crises to occur since the Great Depression, for instance because today’s unemployed have access to technologies that did not exist in previous recessions. Certainly the recessions of the 1970s and early 80s are too often overlooked in this discussion, perhaps due to nostalgia. In any case, it is still too early to tell. The Great Depression in the US saw little economic or employment growth for an entire decade, so at the very least we will not find out how apt the comparison is for  several more years.

 5.      Greece Matters

Greece`s economic problems have been discussed so often in the news that many people have gotten the idea that the country is a significant contributor of Europe’s overall economic crisis. It is not. Though extremely troubled, Greece is actually too small to affect Europe in any meaningful way beyond serving as a harbinger of or catalyst to its real problems – which include, for example, fifty percent youth unemployment in Spain, the world’s twelfth largest economy. The entire Greek economy is actually only about the size of that of Maryland; it is smaller than 16 other European economies. In other words, believing that Greece is the cause of Europe’s problems is sort of like believing that poor sales of snacks is why Blockbuster went bankrupt.

6.      India Is a Major Economic Power

Despite having a population of 1.3 billion people, India has a nominal economic output that is only about as large as those of Canada, Spain, or Mexico. Though India is undoubtedly a regional economic power, boasting an economy larger than those of Pakistan, Bangladesh, Saudi Arabia, Iran, Sri Lanka, and Myanmar combined, it is not yet a global power, and does not belong in the same breath with China as it is so often put.

One reason for this confusion is that economic size is often adjusted for purchasing power parity rather than looked at nominally, which puts India as the third largest economy in the world. While ppp-adjusted gdp is by no means irrelevant, it ignores the fact that India is one of the world’s most import-dependent economies: it is, for example, the largest or second largest importer of coal, oil, and weapons, and imports equal about 30% of its gdp, quite a bit higher than China and much higher than the US or Japan.  As a result, India’s exchange rates – i.e. its nominal gdp – cannot be ignored. Of course, India may still become a major economic power very soon. It might even wind up the world’s biggest economy at some point. But don’t be fooled: today India is a just an impoverished, second-tier economic power, with comparatively little say in world affairs beyond its own region.

7.      It’s Over For Japan

A rapidly aging population, two decades of economic stagnation, a highly publicized nuclear meltdown, and the spotlight-stealing dynamism of its Chinese and South Korean next-door neighbors has flipped perceptions of Japan from that of the rising power of the world in the early 1990’s to a fallen one today. Behind Japan’s low-growth exterior is an economy that is still the world`s third largest by far, however, bigger than those of Germany and England combined. In fact, if instead of using gross domestic product as a measuring stick you use the United Nations’ Inclusive Wealth Index – which attempts to measure not only growth itself but also the medium-term socio-political and financial sustainability of such growth – Japan’s economy ranks second, with a rating greater than those of China and Germany combined. So don’t count Japan out just yet.

8.      The World Is Flat

Globalization is real, but it is not yet as real as many people think. Here are a couple of statistics that should prove this: only an estimated 35 percent of people in the world have even the most basic access to the internet; North America relies on extra-continental trade that is equal in value to only around 7% of its economic output; Europe relies on extra-continental trade that is equal in value to only around 12% percent of its economic output. Among large economic regions only Northeast Asia is significantly globalized in its trading patterns, buying huge quantities of natural resources from the Persian Gulf, Southeast Asia, and the rest of the world,  and selling huge quantities of manufactured goods to North America, Europe, and the rest of the world.

But even Northeast Asia is far from being truly globalized. China, for instance, trades roughly 75 percent as much with Japan and 60 percent as much with South Korea as it does with the United States, even though the United States’ economy is more than three times larger than that of Japan and more than thirteen times larger than that of South Korea.For now, therefore, the world is not flat: local, regional, national, and continental links still remain economically more important than global ones.

9.      China Has A Massive Surplus

Politicians around the world often complain that China floods their markets with unnaturally cheap goods but is not willing or able to buy anything back in return. The fact is, however, that China’s economic surplus is not as large as it is generally portrayed, but only seems so because statistics falsely tend to treat Hong Kong and Macau – former British and Portuguese protectorates, now semi-autonomous administrative districts – as if they are still not part of China, though they both speak Cantonese and were officially integrated into the country’s political system in the late 1990s. Paul Krugman wrote an essay on this topic back in 1997, when China was acquiring formal control of Hong Kong back from the British.

Being metropolises, Hong Kong and Macau both import much more merchandise than they export; they can afford to do so because of sales of services – like tourism and finance – and through money that their wealthy residents earn on property or businesses that they own in other parts of China and throughout the world. Thus, when Hong Kong and Macau are counted, China’s trade surplus shrinks by about 15 percent, becoming significantly smaller than those of Germany, Russia, or Saudi Arabia, and smaller in proportion to total economic output than 10 of the world’s 25 largest economies. This reflects the fact that China actually does import a decent amount of manufactured goods, and a massive amount of natural resources, from countries around the world.

10.    It`s All About Culture

Lots of people believe that culture is the driving force of economics – that lazy Greeks, efficient Germans, ‘backward’ Arabs, Confucian Chinese, responsible Canadians, and innovative Americans are the determining players of the world we live in. This is mostly nonsense, in my opinion. Not only may such cultural descriptions be over-exaggerated stereotypes, they also fail to take into account the fact that culture – and, relatedly, politics – does not emerge from a vacuum, but instead stems from more fundamental influences like geography and historical circumstance. Indeed, it should not come as a surprise that physical geography alone does a far better job at explaining present economic outcomes than culture does.

Take Europe, for example. Its north-south economic split is not, as many people think it is, primarily the result of Siesta-inclined Mediterranean cultures, but rather is due to the fact that the Mediterranean region is fairly dry and almost entirely hilly or mountainous, whereas the North European Plain and England are mostly flat and filled with navigable rivers. This has led the two regions to develop very different social and political dynamics, and given a sharp economic advantage to northern Europe ever since the discovery of  trade routes to Asia that circumvented the Mediterranean.

Similarly, the few areas of Mediterranean Europe that are flat, fertile, and easily accessible by water (which are located almost entirely in southern France, northern Italy, and Catalonia) occupy less than 20% of the land in Europe that is situated within 400 km of the Mediterranean, yet account for more than half of its wealth. Geo-economic patterns such as these are hardly unique to Europe, in fact. For example, nearly every country in the world to the north or south of the Tropics has a per capita nominal gdp of more than $10,000, whereas nearly every country within the Tropics has a per capita nominal gdp of less than $10,000.