Embassy of the United States Ottawa, Canada

Ambassador Jacobson speaking to the Canadian Club, 18 October 2011.

U.S.-Canada Relations: Issues and Opportunities

Ottawa, October 18, 2011

As prepared for delivery.

As I was thinking about what to say here this afternoon, I was reminded of a comment by H.L. Mencken, the great American journalist of the early 20th Century. He said: "A cynic is a man who -- when he smells flowers -- looks for a coffin."

There are some people who look at the relationship between the United States and Canada and walk past the flowers searching for the coffin.

The relationship between our two countries is probably the strongest it has been in generations, perhaps ever.

We have the largest trading relationship between two countries in the history of the world. Last year our two-way trade was $526 billion dollars. That's more than $1 million each minute. That means that during this speech, depending on how long-winded I am, $20 or $30 million in trade will cross our borders.

That's great for both of our economies...So I plan to go on for as long as possible.

When you add in foreign direct investment we have a $1 trillion a year economic relationship.

Based on current projections, by year end the trade between the United States and Canada will have increased since the beginning of 2010 by $150 billion. That increase is about the same as our total trade last year with India and Brazil and Russia and South Africa combined.

I'll give you another one. If Ontario were an independent country, it would displace Japan as our 4th largest trading partner behind Canada, Mexico and China.

There are more than 100 million people who cross our border every year. In the first half of 2011 that number was up by 9%.

As a result of the February 4 Beyond the Border and Regulatory Cooperation initiatives launched by President Obama and Prime Minister Harper, we are in the midst of rethinking the border -- making North America safer for all of us and making the border more efficient for trade.

We help each other around the world -- in Afghanistan and Libya, at NATO and at NORAD.

We are about to celebrate 200 years of continuous peace following the war of 1812. A peace which should serve as a model of hope to people around the world, people who believe they will never be able to get along peacefully with their neighbors.

I am here to tell you that the United States is unbelievably lucky to have Canada as our neighbor.

But in the last few weeks three unrelated events have gotten a lot of attention. And some among us on both sides of the border have tried to draw the conclusion -- sometimes without resort to the facts -- that somehow there's a funeral in our future.

I'd like to address each of these issues head on. I want to try to bring some perspective into the discussion.

First, a few weeks ago, the Chairman of the Federal Maritime Commission, Richard Lidinsky, was in Montreal to participate in a conference. Among the things he discussed was that he had been asked by two U.S. Senators from Washington State to look into the fact that the United States was charging a Harbor Maintenance Fee in Seattle that was not being charged in Vancouver.

As a result -- perhaps not shockingly -- a lot of shipping was being diverted from Seattle to Vancouver. Was there something he could do to level the playing field?

Now...the rather obvious solution to the fact that the United States was shooting itself in the foot by charging too much was to reduce those charges. Nonetheless, we heard a hue and cry that the United States was contemplating imposing duties or taxes or some sort of fees on goods that were shipped through Canada and into the United States.

In response to the uproar the Federal Maritime Commission Chairman issued a statement. He hoped to put the issue to an early rest. He said the Commission was going to look into the issue of the Harbor Maintenance Fee in Seattle. But (and I am quoting him): "...contrary to some overheated claims ... no one at the FMC or in the U.S. government has raised the prospect of levies, sanctions, or tariffs. I am simply talking about a study of the facts."

I kind of figured that would be the end of it. I was wrong. People continued to say the US was about to impose tariffs on goods that had arrived in Vancouver. I thought maybe I had misread Chairman Lidinsky's statement. Maybe what seemed pretty clear to me wasn't.

So I called him. I asked: Was he contemplating imposing fees, or tariffs, or taxes on goods entering the US from Canada? The Commissioner assured me categorically that he was not. Nor was anyone else.

What he was going to do was study the issue. And he was going to give everyone an opportunity to weigh in. He said he hopes to complete the study some time in the spring. And while he was not going to prejudge what--if any--solutions he might recommend after he heard from all interested parties and after he completed his study, there was one thing he was quite sure of. He would not propose taxes, or fees, or tariffs on good entering Canada.

Among other reasons, the Federal Maritime Commission has no authority to impose duties, or taxes, or fees on goods entering the United States from Canada. So I'm here to give all of you -- and all Canadians -- comfort. We don't plan to divert traffic to Seattle from Vancouver by imposing tariffs or taxes or fees on goods crossing into the United States from Canada.

If that -- somehow -- changes, I promise that I'll personally come back here to the Canadian Club -- with egg on my face -- and explain how I got it wrong.

The second issue that is making some folks see coffins among the flowers of the Canada/US relationship is the "Buy America" provision in the President's Jobs Bill he proposed to Congress last month.

The Jobs Act is a $445 billion bill to help get the US economy back on track. The vast bulk of the bill consists of proposals for payroll tax cuts for the middle class, extensions of unemployment benefits, and education investment.

A small part of the bill relates to repairs of infrastructure and rebuilding of schools. It was to these parts -- and these parts alone -- to which Buy America applied. And -- of course -- most of these expenditures on infrastructure and schools would be for things like land and labor which Canada couldn't supply anyway.

I want to make four points about the President's Jobs Bill.

First, the single most important thing the United States can do to help the Canadian economy is to get our own economy back on track. That's what the President is trying to do with his Jobs Bill.

And in case you haven't noticed, it's not so easy for him to get things through Congress. So he had to make a tough call. He had to introduce a bill that had some chance of passing. Hence the Buy America Provision.

If the bill doesn't pass, the US economy -- and the Canadian economy with it -- continue to suffer.

And when you contrast the consequences of the Buy America provision on Canadian commerce -- probably a few hours of that annual trade I talked about earlier -- with the benefits to the Canadian economy of the bill as a whole I suspect the vast majority of economists in Canada would say they'd take the bad with the good.

Second, the Jobs Bill itself says the Buy America provisions will be interpreted in accordance with our international trade obligations. That includes our NAFTA and our WTO obligations to Canada. I'm here to assure you, we will live up to our commitments.

Third, no two countries on earth have a better track record of working out our trade differences than the United States and Canada.

And fourth -- Buy America or no Buy America -- last week the American Jobs Act was rejected by the United States Senate in the face of one of the hundreds of Republican filibusters since President Obama took office. The President has said he will try to get parts of the Jobs Bill through Congress as separate measures. And for the sake of the United States economy -- and for the sake of the Canadian economy -- we should all hope he is successful.

The third coffin sighting arises from recent media coverage of an issue that has been around for about 100 years, since the United States imposed an income tax in 1913. From the beginning, my country has taxed the incomes of American Citizens no matter where they live, no matter where they earn their livings.

This is different from the way Canada -- and some other countries -- do it.

The good news, however, for US and dual citizens living here in Canada, is that you get a credit for taxes paid to a foreign country. And because tax rates in Canada are typically higher than the rates in the United States, most US and dual citizens living in Canada who pay their taxes to Canada don't owe any tax to the United States though they do have to file a US return as all other American citizens do. (I might add for the record that someone some place might have an anomalous tax situation where they pay tax in Canada yet still owe tax in the United States. And I'm certainly not here to give anyone tax advice.)

The situation, however, is different for American citizens living in some other countries, particularly the so-called tax havens. In those places with little or no income tax, Americans will owe tax to the US since their deduction for taxes owed to the Cayman Islands, for example, will be much lower than the taxes owed to the US.

And given our budgetary problems, the United States wants to make sure we are paid all the taxes we are owed. American citizens shouldn't be able to avoid their tax obligations by establishing a residence in a tax haven.

There are two particular problems with the operation of these rules here in Canada. First, there are so many dual citizens, typically by birth, probably more than a million. So this issue is much more common here than in any other country in the world.

Second, the penalties -- at least in a theoretical sense -- can be quite severe.

So you could have a situation where some 70-year-old grandma:

• was born in the US;
• moved back to Canada as a young child;
• never earned any money in the US;
• has no assets in the US; and
• dutifully paid all of her taxes in Canada.

She didn't file a US return because she didn't think she had to. And because she didn't owe any US taxes. Nonetheless, grandma could be theoretically subject to serious penalties. To my knowledge we have never gone after a grandma in those circumstances.

But there has been a lot of press about this lately and people are worried that we will come after them.

When I read all of this I was concerned. So last week I called the Commissioner of the United States Internal Revenue Service to see what we could do. I explained the problem to him.

The result is that both he and I are sympathetic to the concerns. We are going to work together to see if we can't find a way to accommodate grandma -- and others -- here in Canada. But we have to figure out a way to do it without letting the person who is trying to evade taxes in the Cayman Islands off the hook.

My message on this one is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible.

So what's the point of all this?

Well, unlike Mencken, sometimes when you smell the flowers you are actually in a garden and not at a funeral. And this is one of those times. The relationship between our two countries is in full bloom.

And with the continued efforts of people like you on both sides of the border we will be able to make the best relationship on earth even better.

Thank you very much.