How U.S. spending cuts can hurt Canada

The billions in automatic spending cuts in the U.S., which come into effect today, could have an impact on cross-border trade with Canada as well as contribute to a general economic slowdown.

"It's very hard to say," Ambarish Chandra, assistant professor of economics at the University of Toronto, said of the potential effects here.

"I think even within the U.S. it's not clear where the axe will fall. There is so much uncertainty about exactly what programs are going to be cut and which ones aren't."

However, given the sheer size of the cuts — the plan involves slashing $1.2 trillion in federal spending by 2021, including $85 billion this fiscal year — the sequester will undoubtedly have some impact, particularly with respect to cross-border travel and trade.

U.S. Homeland Security Secretary Janet Napolitano said earlier this week that her department would be slashing 5,000 border-patrol agents if the cuts go through, and that would ultimately slow some of the busiest crossings between Canada and the U.S.

U.S. Customs and Border Protection is also preparing to reduce its work hours by the equivalent of 2,750 inspectors as well, meaning cargo inspections at the border could drag on.

That will undoubtedly have an impact on the approximately $1.6 billion worth of goods and 300,000 or so people crossing the U.S.-Canada border each day.

The industry group Canadian Manufactures and Exporters warned on Monday that the cuts could result in longer border wait times and longer processing times.

"Just-in-time shipments, critical parts deliveries, perishable commodities and cross-border business travel are among the most vulnerable sectors to feel the border pinch," it said in a statement.

However, delays at the border will likely take some time to materialize, said Bill Anderson, Ontario research chair at the University of Windsor's University Cross-Border Transportation Centre.

Many federal employees must be given a 30-day notice before their jobs will be furloughed so there may be time to avoid the impact on border traffic.

If politicians can reach a deal to prevent the cuts, the potential effect could be relatively minor, Anderson said.

"By the time you get to the first of April, if we're still in the sequester, then I think you will see some pretty significant delays at the border," he says.

The other concern in Canada is the result of a slowdown in the U.S. economy.

The non-partisan U.S. Congressional Budget Office estimates that the sequester could slow GDP growth by 0.6 per cent this year and result in the loss of about 750,000 jobs.

"In the longer term I think it's going to be more of a general impact besides just the border delays, it's going to have an impact on maybe slowing down the North American economy, which is bad for Canada in general," Anderson said.

Canadian businesses that depend on U.S. government contracts — those that manufacture goods for the defence and transportation industries, for instance — could be affected depending on where the cuts fall, said Stephen Clarkson, a professor of political economy at the University of Toronto.

If there isn't any money to "buy components for production that comes from Canada then that would have a more immediate effect," he said.

Canadians travelling to the U.S. by air might also want to brace for lengthy delays, if the dire warnings from U.S. officials become a reality.

U.S. Transportation Secretary Ray LaHood has said the sequester could create delays of up to 90 minutes at some airports.

On the other hand, Republicans have accused the administration of dramatizing the impact on the economy as a whole, including the potential impact on air travel.

The sequester — with its automatic and arbitrary cuts to both defence and discretionary domestic spending — was designed to be untenable to both the Democrats and Republicans in the hopes of spurring a compromise in the attempt to rein in U.S. government spending.

Congressional leaders are set to meet today with President Barack Obama to attempt to find a solution, hours after the midnight deadline.

The cuts were originally set to go into effect at the start of this year as part of the so-called fiscal cliff crisis, but were postponed for two months after Democrats and Republicans agreed on a compromise that saw tax increases for wealthy Americans.

That compromise was largely seen as a victory for Obama, which may be why some Republicans are taking a tougher line in this latest confrontation and don't seem to mind even the defence cuts planned for the Pentagon.

As the impact of the sequester is felt across the country as a whole and within specific industries, in particular, pressure could mount on politicians to reach a deal to avoid the automatic cuts.

Obama has been ratcheting up the pressure, campaign-style, on congressional Republicans, and has been trying to get Republican governors to weigh in as well. The administration feels the proposed cuts, and any uncertainty surrounding them, will halt the still fragile economic recovery and add to the unemployment lines.

"I would say in the most positive scenario, the sequester goes into effect but they realize quickly that it's doing a lot of damage and they work to overturn that," said Chandra. "If that’s the case and it's only been in effect for a week, two weeks, that's something the U.S. economy can withstand."

If no deal is in sight, however, and the impact begins to be felt in Canada, Chandra said Ottawa should make its displeasure known.

He points to the Beyond the Border agreement, which was designed to streamline cross-border trade between Canada and the U.S.

Earlier this week, Foreign Affairs Minister John Baird said Ottawa would be watching closely to see whether the deal would be affected by the automatic cuts, saying the deal is key to the prosperity of both countries.

"This is not just a purely domestic matter for the U.S.," Chandra said.