(AlbertaIndex, July 21, Monday) --- Alberta’s economy has greatly benefitted from free trade and its close ties with the US, said the provincial government citing a new study by the University of Alberta School of Business’ Western Centre for Economic Research.

        But that was before a slew of issues started to explode this year, showing the growing risk Alberta in particular, and Canada in general, are exposed to with its heavy dependence on the US economy.

The report, Alberta’s Export Experience Under Free Trade Agreements: 1988-2007, was concluded --- fortunately or unfortunately ---just before the extent of America’s economic problems became clear.

Up till early 2008, US officials including President Bush, Treasury Secretary Henry Paulson and Federal Reserve board chairman Ben Bernancke and the business media were either downplaying or insisting that the worst of the nation’s economic woes were behind them.

In recent months, the stocks of Canadian banks have been dragged to 52-week lows on investor fears that they have unreported widespread exposures to the US subprime and credit mess. Fannie Mae and Freddie Mac, the twin giants of the US mortgage markets, are on the verge of the once unthinkable prospect of collapse while a run on a major California bank last week has set off comparisons to the financial collapse of the Great Depression of 1929.

Ontario’s auto industry is in crisis mode as the US auto giants crumble while the tourism sector, including Alberta’s, is reeling, from the sharp drop in US arrivals.

Meanwhile, US politicians, environmentalists and lobby groups are calling for a ban on the import and use of Alberta’s “dirty” oil. More than 90% of the province’s oilsands exports end up in the US although that could change if Asia’s energy hungry economies find a way to viably import the oil.

Alberta’s gains from 19 years of free trade agreements

The U of A report, written by Dr Rolf Mirus, concluded that free trade agreements have been crucial to Alberta’s economic growth over the past 19 years. It studied Alberta’s export performance since 1988, the year before the first free trade agreement came into force.

It said: “Free trade agreements are vital to Alberta’s economic well-being because they reduce barriers to trade and maximize opportunities for Alberta businesses in foreign markets. More than one-third of Alberta’s gross domestic product is derived directly from international exports.

“Alberta’s exports to partnering countries, including the US, Mexico, Chile, Israel and Costa Rica have increased in total by 683 per cent since 1989 when Canada’s first free trade agreement became effective. Alberta’s exports to non-partnering countries grew by 166 per cent during the same period.”

The report suggests the North American Free Trade Agreement (NAFTA) has been of particular benefit to Alberta’s economy. The province’s exports to the region totaled $72 billion in 2007, compared with $13 billion in 1993.

It highlighted other key points:

• Alberta’s total merchandise export value has increased by 525 per cent since 1988, the year before the inception of the Canada-U.S. Free Trade Agreement (FTA).

• Alberta’s share of total Canadian exports has nearly doubled from 9.6 per cent in 1988 to 18.4 per cent in 2007.

• Energy continues to be Alberta’s principal export, accounting for 68 per cent of Alberta’s total exports in 2007 compared to 64 per cent in 1993.

• Machinery has become the second most important export for Alberta. Since 1993, growth in Alberta’s machinery exports has increased by 636 per cent.

• Since the inception of the NAFTA, there has been tremendous growth in Alberta’s value-added exports. Examples include organic chemicals, plastics, machinery and precision instruments.

RBC notes negative impact of US slowdown

The weakening U.S. economy contributed to Canada’s economic growth taking an unexpected drop in the first quarter of 2008, said RBC.

In a report issued before the U of A study, RBC forecast that Canada’s economic growth would slow to 1.4 per cent for 2008.

“Canada’s economy will continue to be hampered by flagging US demand for exports, but domestic demand will more than offset the drag this year,” said Craig Wright, said RBC senior vice-president and chief economist.

RBC forecasts US economic growth to be a modest 1.5 per cent this year.

It said US economic risks are largely on the downside as greater-than-expected restraint could emerge from still high energy prices, tight credit conditions and weakening labour markets.

But the outlook’s not all gloomy.

“The surprise economic contraction will be short-lived as growth prospects for the remainder of the year should brighten, with financial market pressures starting to ease, the US economy getting a boost from the issuance of tax rebate cheques, and commodity prices remaining historically high,” said Mr Wright.

US economic growth is projected to strengthen to 2 per cent in 2009. This modest growth outlook will help keep inflation pressures under control through the forecast.

“We believe that the US economy will avoid a contraction this year and should start to see sustained upward growth momentum in 2009,” said Mr Wright.

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