Digesting hard truths about Canada’s subpar trade performance

Canada is a mid-sized economy, responsible for less than 2% of global output. Closer to home, we represent about 8% of all economic activity across the United States, Canada and Mexico combined.

Canada is also an open economy that depends heavily on cross-border flows of trade, investment and knowledge to underpin our high standard of living. To pay our way in the world and generate the income necessary to buy imports, Canada must sell commodities, manufactured goods and services to customers in other markets.

Last year, Canada exported $521 billion of goods, along with $107 billion of services – for a total of $628 billion in foreign sales. The accompanying table breaks down these exports by broad categories, with goods and services treated separately.

Natural resource industries continue to make an outsized contribution to Canada’s prosperity. Added together, energy, minerals, metal ores and products, forest products and agri-food and fish accounted for more than half of all Canadian goods sold abroad in 2016. Within the natural resources sector, energy provides the biggest share of exports, with oil ranking as the country’s No. 1 export commodity.

Outside of natural resources, motor vehicles and parts are also vital to Canada’s export success, with close to $100 billion in foreign sales last year.

Together, natural resource products and motor vehicles and parts supply more than 70% of Canada’s total merchandise exports. So, the first hard truth about Canada’s trade is this disproportionate reliance on a handful of industries to sustain exports. Most other advanced economies – the U.S., Britain, Germany, France, the Netherlands, even Italy – exhibit greater diversity in their export mix.

The second hard truth is the concentration in the markets we do business with. In 2016, three-quarters of Canada’s exported goods were shipped to the United States; at the same time, the U.S. supplied two-thirds of our merchandise imports. America is also the final destination for more than half of Canada’s exports of services – a fast-growing piece of our overall trade.

The American-centric nature of Canada’s trade is problematic, given projections suggesting the U.S. will account for dwindling shares of both global consumption and world economic growth in the decades ahead. And it provides a sobering backdrop as talks get underway to overhaul the North American Free Trade Agreement (NAFTA), which President Donald Trump has criticized as contrary to America’s economic interests as the agreement is currently written.

Economically, Canada has much to lose from any diminution in the access we enjoy to the world’s biggest market under NAFTA. The risk of higher American tariffs, more non-tariff barriers and other measures that would further “thicken” the border is one of the factors dampening business investment in Canada.

The final hard truth about Canada’s trade centres on the lacklustre growth of exports over most of the past decade. This reflects not just shifts in commodity markets, but also the erosion of Canada’s relative competitive position for new investment across a swathe of manufacturing and natural resource industries. Since 2008, the value of Canada’s merchandise exports has risen by just 3%. To be sure, lower oil and natural gas prices are a significant part of the explanation, but the softness in exports is also evident in sectors such as electrical/electronic equipment, chemicals, plastics, metal and mineral products and some segments of forestry. Fortunately, we have done better on the services side, but this has not been enough to offset the sluggishness in goods trade.

Like it or not, Canada enters the NAFTA renegotiations with a weak hand. Our basket of merchandise exports looks to be insufficiently diverse, we are inextricably tied to the American market at a time when protectionist sentiment is on the rise stateside, and there is mounting concern about Canada’s ability to attract new investment and the high-value corporate, professional and technical jobs that go with it in today’s increasingly competitive global economy.

Instead of raising taxes and adding to an already costly and complex regulatory environment for business, government policy-makers at all levels should be paying greater attention to the challenges weighing down the Canadian export economy. 

Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist.

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