The World Economy Has Changed

It is no secret that the Harper government has started an all-out push to sign trade deals globally. Last week’s leaked foreign policy document merely confirms that this government has placed the highest priority on signing trade and investment deals, particularly with fast-growing developing markets. Ottawa is already negotiating or exploring deals with almost 20 countries or regional groupings.

According to this CBC article, the confidential foreign-policy document warns that Ottawa has been slow to open new markets in Asia, leaving Canada firmly tied to the U.S. economy for the long-term. “Canada’s trade and investment relations with new economies, leading with Asia, must deepen,” it says.

Canada is indeed late to the table. Canadian policymakers and many business leaders have been slow off the mark to take full advantage of the rise of fast-growth markets. Many other countries – both governments and businesses – are courting the same players. And many of them have a head start on Canada.

But the common wisdom that Canada cannot reduce its dependence on the U.S. market, and that Canada will trade little with fast-growing markets elsewhere, is starting to change. An important shift is already underway.

Canada’s traditional areas of trade growth have plateaued. While global trade exploded over the past decade, Canada’s exports to the U.S. stagnated (see chart). (My colleague, Michael Burt, refers to the last decade of Canada’s trade as the “lost decade.”)

By contrast, Canada’s trade with fast-growth markets elsewhere has taken off. Trade and investment flows show that Canadian companies have been venturing into these markets, investing in them, or importing from them.

Canada’s trade (imports and exports, indexed 2001=100)

Sources: Industry Canada; Statistics Canada; The Conference Board of Canada.

The trend is poised to accelerate. A new Conference Board Global Commerce Centre report, What Might Canada’s Future Exports Look Like?, shows what Canada’s trade might look like by 2025. The U.S. will remain Canada’s largest export market for the foreseeable future. But Canada’s share of our goods exports to the U.S. will drop from almost three-quarters in 2010 to just more than two-thirds in 2025.

By contrast, Canada’s share of goods trade with booming China could expand from three to almost seven per cent by 2025. The same goes for other fast-growing markets. The share of Canada’s exports to India will more than double, and will be roughly equal in size to the share of exports to our North American neighbour, Mexico. Trade with Brazil will also double by 2025.

If the pace of growth continues, these amounts and shares will become more and more important.

The scale and rapid growth of opportunities on offer in these fast-growing markets is staggering. And even with growth tapering off in some of the largest, fastest-growing economies such as China and India, rates are far above the meagre growth rates seen in Canada’s traditional trade partners.

The opportunities extend beyond the obvious candidates of China, India, and Brazil to others in Asia, Latin America, the Middle East, Africa, and Europe. Growth in the Southeast Asian nations, for example, averaged a whopping 15 per cent on average over the past five years. This compares with zero per cent growth in the Great Lakes states, which are equivalent in economic size to the Southeast Asian region.

Luckily for us, areas of Canadian strength line up well with booming opportunities elsewhere. Auto parts, for example – an obvious area of Canadian strength – have grown by almost 20 per cent annually in India over the past five years. Same goes for double-digit annual growth in telecommunications and banking in India – other areas of Canadian strength.

In sum, the world economy – and Canada’s role within it – is changing at a dramatic pace. Our research shows clearly that Canada’s traditional trade relationships have already changed – and these changes are poised to accelerate in the coming years. Competition has intensified and opportunities are exploding.

International trade is not an end in itself. It improves living standards, and is particularly important for a small economy such as Canada’s. To improve – or even maintain – Canadian living standards in the face of these dramatic global economic changes, Ottawa will need to help workers at home adjust to intensified competition, while successfully opening doors to other economies. And more Canadian companies will need to walk through those doors.