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Illustration of two people standing on a map of Canada, both looking through binoculars; one at the United States, the other overseas. (Jori Bolton/The Globe and Mail)
Illustration of two people standing on a map of Canada, both looking through binoculars; one at the United States, the other overseas. (Jori Bolton/The Globe and Mail)

Agenda 2020

Are Canadian businesses too dependent on selling to the U.S.? Add to ...

Canada has always looked directly south of its border for most of its trade. But globalization has opened the trade world, as technology, international institutions and free-trade agreements make emerging economies more viable partners. Looking ahead to the next decade, most experts forecast that these countries will likely see much greater growth than mature economies, which leads us to ask: Should Canada be looking beyond the United States more often for trade?

To discuss this possibility, The Globe and Mail turned to two prominent Canadian economists: Peter Hall, vice-president and chief economist of Export Development Canada, and Someshwar Rao, a former top economist with the Economic Council of Canada and Industry Canada, and currently a research fellow at the Institute for Research on Public Policy, and president of S. Rao Consulting Inc. Mr. Rao recently co-wrote a paper that recommended, among other findings, that Canada should look to offset slower demand for its goods in the U.S. and Organisation for Economic Co-operation and Development (OECD) economies by looking at growing emerging markets.

Are we too dependent on the U.S. market, looking ahead five or six years?

Someshwar Rao: Right now, the U.S. accounts for about 65 per cent of our exports. The U.S., Europe, Japan, China and the East Asian emerging economies, in total, account for about 90 per cent of our exports. And in my view, they will continue to dominate Canadian exports as a destination. The U.S. and European economies will continue to grow at a slower pace because of the demography and population aging, which are interlinked. So what I see is, even though the U.S. has continued to be the dominant destination for Canada’s exports, if Canada wants to increase exports as well as aggregate demand, it needs to strengthen commercial linkages with emerging economies – large and fast-growing economies like China, India, Brazil and South Africa and Indonesia. We need to strengthen our commercial linkages with these economies if we want to increase the export growth as well as aggregate demand.

Peter Hall: The United States cannot be lumped together with the rest of the OECD markets in terms of its overall market potential growth, because its demographic fundamentals are quite different from those of western Europe and a lot of the other OECD nations. They don’t have an aging population problem that’s as grave. And that is actually, together with their superior productivity performance, allowing for a rate of potential growth that is quite superior to the rest of the OECD. We can foresee U.S. potential growth in the 3-per-cent zone going forward, versus the rest of the OECD, which might struggle to get 1.1- or 1.2-per-cent growth. Going forward, we don’t actually see the dampening growth dynamic. That’s the U.S. side of things. I have to say that market diversification is actually under way. Since about 2000, emerging market trade has gone from just 4 per cent of Canada’s merchandise trade to, now, 12 per cent. Were that trend to continue, we could easily see, by 2025, the share of emerging market trade to the total of Canadian getting as high as a third to 40 per cent of our trade. So I don’t think we’re too dependent on the U.S. market. I’ll qualify that by saying that in certain industries, absolutely we are – oil and gas being one of them. Our share of trade with the United States is high, but we’ve got to remember that we do a lot of trade with other nations through the United States, either through American supply chains or through shipments, from Canada to another country through the U.S. as strictly a geographic thing.

SR: Peter says the potential growth is going to be 3 per cent, but I’m not so sure about that. And labour productivity growth is not a constant, so it will react to the growth in demand as well as the supply-side factors. All these are interlinked, so my feeling is: When we slow down in U.S. growth, it will not be 4 or 5 per cent like in the past. Unless productivity growth takes off, I do not see a big increase in economic growth in the U.S. I agree with Peter that the U.S. is going to continue to be the dominant destination for Canada’s exports, and I don’t think we are too dependent, given the geography and our historic linkages. But we have a lot of barriers in the emerging economies – trade barriers, as well as investment barriers, so we need to strengthen our linkages.

PH: I’m one who believes that the U.S. economy is the engine of world growth at the moment, and that emerging markets are still follower economies. And so that engine is actually firing up now. Their growth hasn’t been spectacular to date, but our view is that’s precisely because the American economy, until this point, has been in the business of using up the excesses that were accumulated ahead of the recession actually occurring.

What specific markets could Canada look to in the next five or six years to enhance its productivity or to increase its exports?

PH: It’s clearly the faster-growing economies, and clearly those economies are the ones that are catching up with the rest of the world. Technology, free trade agreements and international institutions have together enabled emerging markets to open up and to participate in the global growth we see at the moment. Being in catch-up mode, they are growing much more quickly. They can borrow technology that’s already been developed and implement that to leapfrog over hurdles that our economy has faced in the past, and that gives them a faster growth dynamic. The BRIC nations are the ones where growth is fast-paced and the level of activity is highest. But there are faster-growing nations that are in that sub-BRIC class, and those are the ones that excite me as well, because the annual rates of growth are well into the double digits, and so the share of their trade as a percentage of our total trade is climbing even more quickly than the emerging-market average. The ones that have the most promise at the moment, as far as we can see, are economies like Indonesia and Vietnam; and there is a fair amount of growth between Canada and South Africa. We see the Pacific Alliance economies doing very well – Mexico, together with Colombia, lots of potential in Peru, as well. And, of course, our success continues with the Chilean economy, thanks in part to our free-trade agreement with them.

SR: As I mentioned before, the U.S. will continue to be the dominant destination for our exports, but at the same time, these emerging economies, as Peter pointed out and as I pointed out in my recent paper, the BRIC economies as well as sub-BRIC economies like Indonesia, South Africa and Vietnam, they’re going to be the fast-growing economies. We need to strengthen our commercial linkages with them by having trade and investment agreements.

How can Canadian exporters position themselves in the next five to six years to compete with low-cost rivals that are coming out of emerging markets?

PH: We’ve got a couple of different problems here. One is how we actually structure our businesses to deal with these competitive pressures. The other is we just don’t have the labour. Going into this cycle, we’ve got significant demographic pressures, so when we hit 2016, according to the medium-case demographic projection from Statistics Canada, our population 15 to 54 years old actually starts to decline; 2016 is the first year it declines, and it goes on for five or six years after that. We’ve never had to deal with that during peace time that I can see. Business is generally not prepared for that kind of demographic hit. The reason I pick on that age cohort is that it is the highest participation cohort in the economy. Once you get into the 55+ crowd, the participation rates tend to drift downward. It is a critical group. That means we’re going to have to think differently about how it is we actually do business. I believe one of the ways of doing that is to engage in something I’m calling importing labour without moving it. That is taking more labour-intensive parts of our production process and finding countries where that can be done more efficiently than it can be done here in Canada, and then economizing on our labour by actually moving it up the value chain. So that means engaging in a number of different exercises that increases human capital, so that they can actually do more productive work inside of Canada. The fundamentals are there for that, I think, but that’s a huge strategic way of not only competing with, but working together with, these fast-growing, emerging markets for mutual betterment.

SR: I agree with Peter that we need to move up the value chain. We have to specialize in high value-added activities, and that can be done by strengthening our trade and investment linkages with fast-growing, emerging economies so that we can take advantage of low value-added and low-to-medium value-added activities. Some of these tasks can be shifted there, and at the same time we can concentrate on natural resources, which is a competitive advantage, and high-value activities.

Responses have been edited and condensed.

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