Is America bringing us down?

Canada currently finds itself tethered by its southern border to an economic anchor. The United States still grapples with near double-digit unemployment rates, surging foreclosures and sputtering consumer spending. America's travails slashed Canada's export market and blocked the chance for "an absolutely rip-roaring recovery," according to Douglas Porter, deputy chief economist with BMO Capital Markets.

Canada's largest trading partner is dragging it down. But the United States' economic woes don't just mean a weak market for Canadian goods. The dismal outlook has inflamed America's protectionist tendencies. It took more than a year for Canada to negotiate a waiver of the "Buy American" provisions contained in America's $787-billion stimulus package. Less than a month after that dispute was resolved, 28 members of Congress introduced a bill calling for the scrapping of the North American Free Trade Agreement. The situation is so worrisome that the Canadian Council of Chief Executives has enlisted Gordon Giffin, the former U.S. ambassador to Ottawa, as its envoy in Washington. The message from the U.S. is clear: Americans can't afford our goods right now. Even if they could, they'd rather buy American.

"It's that feeling of — I hate to say 'attacked' — but that the United States has to look inward for solutions," says Birgit Matthiesen, a Washington-based adviser to the Canadian Manufacturers and Exporters (CME).

As America pulls up its drawbridge, it seems an ideal time for Canada to pursue other trading partners. Everyone knows that emerging markets like India, China and Brazil are where the future lies anyway, right? But for Canada, the inescapable fact is 73% of our exported goods go to America. Canada's annual trade with India represents less than two days of trade with the United States. Trade with the European Union, Canada's second-largest trading partner, is one-ninth of what crosses the U.S. border. Diversification is a good idea, but it doesn't offer a real alternative to the American market. "Nothing can replace our trading relationship with the United States," says Peter Van Loan, the federal minister of trade. "Growth in other places is a plus, but an American economic recovery is very, very important for Canada."

Canada's interests lie not in divorcing the United States but in wooing it again. There are still too many regulatory differences, too little policy collaboration and too few champions of trade liberalization, business leaders say. Canada can't cut away the millstone around its neck; it needs to hug it even closer.

This summer, it was nearly impossible to find a story on Canada's economic performance that didn't note the United States' insidious downward drag. From commodity prices to manufacturing sales to currency trading, America's woes were constantly cited as Canada's biggest obstacle to full recovery. In many respects, the current situation mirrors the recessions of the mid-'70s and of a decade ago, when Canada's economic downturn was far milder than America's. In other cases, notably the early '80s and '90s, the Canuck recession was far worse than in the United States. "There is no official recession playbook," says Porter. But exports to the United States represent 25% of Canada's GDP.

Only 2.2% of American economic activity is linked to Canada. Americans don't tend to notice when Canada stumbles; when the U.S. tumbles, Canadians are yanked down as well. Consider that Canadian exports to the United States have fallen by 2.2% in the past nine months alone. In December 2008, Canada exported $6.1-billion more goods to the United States than it imported. The surplus has narrowed by nearly $5 billion in less than two years, sitting at just $1.2 billion this July. In the same month, manufacturing sales overall fell 0.9%, while motor vehicle and paper sales, both heavily dependent on the U.S. economy, fell 8% and 5.5% respectively.

America's floundering also kept oil at roughly half of its pre-recession price. It is only thanks to strong domestic demand that Canada has managed to keep grinding upward. "Most of us are very pleased at the extent we've managed to keep soldiering along, given the extent of the U.S. recession," says Van Loan. But as Canada has marched forward, America has found new ways, some intended, most accidental, to trip its neighbours up.

America's protectionist leanings — and Canada's frustrations with them — can be traced to the earliest days of the countries' shared history. In 1878, John A. Macdonald, Canada's first prime minister, was angered by the United States' refusal to negotiate a reciprocal trade agreement. He decided Canada needed to impose higher tariffs of its own. "It is only by closing our doors and by cutting them out of our markets, that they will open theirs to us," he argued. For nearly a century thereafter, pushing for more liberal trade was an unpopular idea. Robert Borden won the 1911 federal election largely thanks to his opposition of a reciprocity agreement with the United States. "That issue of free trade was settled in the election of 1911," Brian Mulroney said while running for the leadership of the Progressive Conservatives in 1983. "It affects Canadian sovereignty and we will have none of it," he added. Of course, Mulroney later became Canada's great champion of trade liberalization.

Worried about rising protectionism in the United States and buoyed by the 1985 Royal Commission recommending liberalization, Mulroney signed the free trade agreement in 1988. The North America Free Trade Agreement (NAFTA) followed in 1994, adding Mexico to the trading bloc. Between 1988 and 2000, Canadian exports to the United States multiplied 3.5 times, from $100 billion to $360 billion. Between 2000 and 2002, Americans consumed 87% of Canadian exports. If free trade seemed a success from a Canadian standpoint, it still had opponents south of the border. Roy MacLaren, who served as trade minister between 1993 and 1996, says his efforts to add Chile to NAFTA were rebuffed by the Clinton administration. "They couldn't get any more trade liberalization through Congress," he recalls. "That ended any further trade liberalization. Or, put another way, affirmed a degree of protectionism."

John Manley, a former foreign-affairs minister who now leads the Canadian Council of Chief Executives, says it took the personal advocacy of Clinton and George H. W. Bush to push NAFTA through the American system. "When have we seen that kind of bipartisan approach, believing that liberalized trade is in the interest of the United States? Not since," he says. "The conversation in the States is a lot more protectionist, and people who speak up against protectionism are less mainstream. And that's got to be bad for us."

The rebuilding of Fortress America began with 9/11 terrorist attacks. New security provisions had an immediate effect on Canadian exports. Between 2002 and 2008, merchandise exports to the U.S. fell by nearly 20%. Increased security at the border hiked exporting costs by as much as 15%.

The costs of regulatory compliance for many Canadian companies now exceed the benefits of free trade, according to the CME's Matthiesen. While border security remains a top priority in the United States, the motivating factor has changed. "In the first few years after 2001, the U.S. response on border management was in response to physical security," Matthiesen says. "In today's climate, it's economic security."

Evidence of economic turmoil feeding protectionist sentiment is plentiful and varied. Bill White, the Democratic candidate in the Texas gubernatorial race, has released attack ads accusing incumbent Rick Perry of wanting to bulldoze a half million acres of private land and "give it to a Spanish company to build toll roads and let the company set the tolls." Meanwhile, India's information technology industry was outraged last month by a U.S. Senate bill that would hike visa application fees for companies that employed 50 or more skilled foreign workers.

In an isolationist one-two punch, the proceeds of the visa fees would be used to finance aerial drones and more enforcement agents for the U.S.-Mexico border. "The flares of protectionism reflect both the economic and political environment," says Matthiesen. "There is that sense in the U.S. that, for the first time in two generations, my future is not as bright as my parents' future."

And that sense of financial uncertainty has affected far more than just America's monetary health. Arizona this spring passed laws making it a crime not to carry immigration documents. Half of Americans now think immigrants are a burden on their country, according to a survey conducted by the Pew Research Center in June. Only 40% of respondents held that view in November 2009, while the percentage of people who feel immigrants strengthen the country has correspondingly dropped to 39% in June compared with 46% eight months earlier. Even the protests against a mosque near the Ground Zero site in New York have their roots as much in economic uncertainty as they do in the aftershocks of the 2001 terrorist attacks, argues Robert Reich, who served as labour secretary under Bill Clinton.