Changes in Canada-U.S. Trade in Intermediate versus Final Goods: Identification and Assessment: STEVEN GLOBERIVAN PAUL STORER

EXECUTIVE SUMMARY A conventional view of Canada-U.S. economic integration is one of the two countries "making things together" rather than simply selling final goods and services to each other. Indeed, one of the major concerns expressed by business leaders and some politicians about security-related border initiatives implemented post-9/11 was that the initiatives would disrupt cross-border supply chains, particularly for industries where just-in-time parts delivery was critical for efficient production. The development and implementation of programs to facilitate faster cross-border commodity flows, such as Free and Secure Trade (FAST), were promoted by multinational companies, especially the automobile companies, to reduce delays of inter-affiliate shipments with their attendant costs. Despite its prominence in the public policy debate surrounding border security and clearance initiatives, there has been relatively little research on the magnitude and nature of bilateral trade in intermediate goods. In particular, there is virtually no statistical evidence on the behavior of intermediate goods trade in the post-9/11 period. This study attempts to fill in the knowledge gap by creating and analyzing time series data on U.S. intermediate goods trade with Canada over the time period 1990-2011. It also provides some analysis of the determinants of the changes observed in bilateral intermediate goods trade. Contrary to the popular premise that bilateral supply chains are becoming more integrated, we find that bilateral trade in intermediate goods as a percentage of total bilateral trade was lower in 2011 than in 1990. Most of the decline occurred between 1990 and 2002. This was followed by a modest recovery in the percentage from 2003 to 2008. The severe recession of 2008-2009 was associated with another decrease in the percentage followed by a recovery. In short, there has certainly been no increase in the intermediate goods intensity of bilateral trade pursuant to the implementation of the Canada-U.S. Free Trade Agreement in 1989. This result is broadly consistent with studies done by the Conference Board of Canada which examined a shorter time period. Our analysis also identifies divergent time series patterns for intermediate goods intensities of imports and exports. Specifically, the two time series are mirror images. U.S. imports of intermediate goods from Canada as a share of total U.S. imports from Canada decreased from 1990 to 2002 and then increased for most of the subsequent time period. The opposite pattern is observed for U.S. intermediate goods exports as a share of total exports to Canada. We identify the extent to which changes in overall intermediate goods import and export trade intensities are functions of changes in the relative importance of individual industries in bilateral trade versus changes in the intermediate goods trade intensities of individual industries. The relative importance of each phenomenon varies over the sample time period. Specifically, both phenomena contribute to observed changes in import and export intermediate goods trade intensities for approximately the first half of the sample time period. In the second half, changes in intermediate goods trade intensity for imports are almost entirely due to changes in industry mix, while changes in the intermediate goods trade intensity for exports are virtually entirely due to decreases in the intermediate goods trade intensities of individual export industries. The different time series patterns for intermediate goods exports and import intensities, as well as the varying contributions of changes in industry trade mix versus changes in the intermediate goods trade intensities of individual industries, suggest that there is no single explanation for the overall behavior of bilateral intermediate goods trade. We find some evidence of bilateral intermediate goods trade intensities being reduced by increased vertical production integration between the U. …