The economies of the United States and Canada are highly integrated, a process that has been accelerated by the bilateral U.S.-Canada free trade agreement (FTA) of 1989 and the North American Free Trade Agreement (NAFTA) of 1994. The two countries are natural trading partners, given their geographic proximity and their (partial) linguistic and cultural similarities. Because 80% of the Canadian population lives within 200 miles of the U.S. border and due to the impediments of Canadian geography, trade with the United States is often easier and less expensive than Canadian inter-provincial trade. Both are affluent industrialized economies, with similar (though not identical) standards of living. However, the economies of the two countries diverge in numerous ways. First, the U.S. economy dwarfs that of Canada. U.S. gross domestic product (GDP) is over 9 times that of Canada in nominal terms and nearly 11 times as large in terms of purchasing power parity. (See Table 1 .) This large and historic disparity has presented opportunities and challenges for Canada. NAFTA provides Canada with a large market for its exports at its doorstep, however it has also led to increased import competition for small-scale Canadian businesses. The Canadian economy is also disproportionately impacted by a U.S. economic slowdown or changes in the bilateral exchange rate. In the past decade from 2001, the average annual real GDP growth rate has been slightly higher for Canada (1.9%) than for the United States (1.6%). Per capita average annual growth rates over the period have shown a similar, if anemic trajectory (0.82% v. 0.62%). Canadian per capita income, in terms of PPP, has remained relatively constant at around 84% of U.S. per capita income. The persistent per capita income gap has proven worrisome to Canadian policymakers as it raises questions about Canadian productivity and competitiveness. In terms of sectoral components of GDP, the United States and Canada are similar. Over two-thirds of both economies are devoted to the services sector, although the sector is larger as a percentage of GDP in the United States (76.9%-70.9%). The manufacturing sector's composition of GDP has fallen in both countries over time, but it is still relatively more important to the Canadian economy (27.2%-22.2%). Agriculture makes up the remaining 1.9% of the Canadian economy and 1.2% of the U.S. economy. In terms of savings and investment, Canada and the United States have diverged. Canada's experience with fiscal profligacy in the 1970s and 1980s caused the country to eschew deficit spending in the 1990s. Parliament consistently passed balanced budgets from 1997-2008, and Canada lowered its ratio of public debt-to-GDP from 100% of GDP in 1996 to 61.3% of GDP in 2008. Yet, deficit spending returned in the 2009 stimulus budget and public debt-to-GDP is now back to 84.0%. The United States has a lower ratio of debt-to-GDP, but it has been trending upwards, reaching 62.9% of GDP in 2010, after years of deficit spending. Some of the differences between U.S. and Canadian economic performance may be traced to the differences in the role and structure of the government in economic life. While both countries can be identified as generally free-market capitalist economies, at times Canada has adopted more interventionist economic policies. Prior to the FTA with the United States, Canada protected her small-scale manufacturing enterprises that produced solely for the domestic market with high tariffs. While these plants provided jobs to Canadian workers, they resulted in higher prices for Canadian consumers and led to a relatively inefficient allocation of national economic resources. Canada has also provided its citizens with a more generous social safety net including a government-run national health service. Canadian citizens pay higher taxes to receive these benefits, but private industry is relieved of providing health care coverage. A different relationship between the Canadian federal government and the provinces also affects economic dynamics. Canadian provinces have relatively more power vis-à-vis Canada's federal government than that of states with the U.S. government. For example, natural resources are under the policy control (and in many cases, ownership) of Canadian provincial governments. In the softwood lumber dispute, provincial ownership and management of forests have made the provincial governments key players in the negotiations. Alberta's vast energy reserves may also cause friction between it and other "have-not" provinces without similar resource endowments. The Canadian federal government attempts to provide a uniform level of services across the provinces by providing "equalization" payments to poorer provinces; however, these payments are a source of continuous squabbling between the provinces, on one side, and the federal government. Canada is the largest single nation trading partner of the United States. Trade increased in 2010, after dropping in 2009 due to the global economic downturn. In 2010, total merchandise trade with Canada was $481.5 billion (a 12.1% increase from 2009), consisting of $275.5 billion in imports and $206.0 billion in exports resulting in a trade deficit of $69.5 billion. In 2010, $1.3 billion in goods crossed the border each day. Trade with Canada represented 15.9% of U.S. total trade in 2010, with Canada purchasing 18.3% of U.S. exports and supplying 14.5% of total U.S. imports. While Canada is an important trading partner for the United States, the United States is the dominant trade partner for Canada. The United States supplied 50.4% of Canada's imports of goods and purchased 74.9% of Canada's merchandise exports in 2010 . While the absolute value of trade continues to increase between the two nations, each nation's share of trade with the other has decreased in recent years. As a share of U.S. total trade, trade with Canada dropped from 20%-15% since 2003. Conversely, trade with the United States dipped from 74% to 63% of Canada's global trade in the same period. Trade is a dominant feature of the Canadian economy. While in the United States, the value of trade (exports + imports) as a percentage of GDP was about 20.7% in 2010, the comparable figure for Canada was 49.3%. Canada's goods exports totaled $386.0 billion in 2010, which represented 29.1% of Canadian GDP; Canada imported $390 billion from all destinations, 31.3% of its GDP. In 2009, Canada's merchandise trade balance fell into deficit for the first time since 1975 and this deficit persisted in 2010. Canada is relatively more exposed to the world economy and to the fortunes of other economies, foremost to that of the United States, than most other countries. Autos and auto parts represent the top U.S. exports to, and second-largest imports from, Canada. Agriculture and construction machinery, computer equipment, general purpose machinery, aerospace product and parts, basic chemicals, pharmaceuticals and medicines, iron and steel, and precision instruments are other major U.S. exports. Primary U.S. imports from Canada outside the automotive sector are energy (natural gas, petroleum products, electricity); pulp, paperboard, and paperboard mill products; aerospace products and parts; nonferrous metal and processing (ex aluminum); and basic chemicals. That the United States and Canada trade substantial volumes of the same goods bespeaks the economic integration of the two economies. This integration has been assisted by trade liberalization over the past 40 years, beginning with the Automotive Agreement of 1965 (which eliminated tariffs on shipments of autos and auto parts between the two countries), through the Canada-U.S. Free Trade Agreement of 1989 (FTA), and NAFTA. Under the FTA (which was incorporated into NAFTA), bilateral tariffs except for certain agricultural products were phased out over a 10-year period culminating in 1998. The elimination of tariffs and the reduction of nontariff barriers have contributed to the process of specialization, as each country is able to produce goods for a larger continent-wide market. Thus, firms are able to improve productivity through increased economies of scale and coordinated production. Such specialization led to increased bilateral trade, much of it in intermediate products. One study estimated that about 45% of U.S.-Canadian trade was intra-firm trade, reflecting the substantial integration of the two economies and contributing to increased efficiency and competitiveness of firms on both sides of the border. Integration of the U.S. and Canadian automotive industries is an example of the benefits of specialization and economies of scale. Before the mid-1960s, each country's industry produced for its own market, due largely to tariffs imposed by both countries. Canadian auto firms (mostly subsidiaries of U.S. firms) were considerably less productive than their U.S. counterparts because Canadian firms produced a variety of differentiated products for a relatively small domestic market in an industry characterized by economies of scale. The Automotive Agreement of 1965 (Auto Pact) between the United States and Canada began the process of integration by eliminating tariffs on shipments of autos and auto parts between the two countries. Thus, each country's industry could specialize in a smaller number of products and use longer production runs. Coordinated production on both sides of the border increased significantly, as did bilateral automotive trade. Coordinated automotive production has raised living standards in both the United States and Canada, and has strengthened the global competitiveness of producers on both sides of the border. Motor vehicles, vehicle parts, and engines made up 15.6% of U.S. exports to Canada and 14.6% of U.S. imports from Canada in 2009 (see Table 2 ).