Stephen Gordon is a professor of economics at Laval University in Quebec City and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE). He also maintains the economics blog Worthwhile Canadian Initiative.
The Canadian dollar is trading near parity with the U.S. dollar, and many observers have expressed concern that the appreciating dollar will make Canadian goods less competitive in export markets and endanger the recovery. These concerns are misplaced.
Clearly, if net exports increase and everything else stays the same, then aggregate demand for Canadian output will increase. But strong exports aren't a sufficient condition for an expansion. They aren't even necessary. In fact, the contribution of net exports to total GDP growth has been negative in two of the last three expansions; see the accompanying graph.
Not every expansion is a variation of the one we had in the 1990s. So what explains the obsession with exports?
Part of the problem is the way net exports show up in the expression for aggregate demand: exports have a positive sign, and imports have a negative sign. But that's exactly opposite to how we should be thinking about the costs and benefits of international trade:
• Imports are benefits: We engage in international trade to get things more cheaply than it would cost to make it ourselves.
• Exports are costs: We send exports to foreigners so that they will give us the imports we want.
In the early 1990's, commodity prices fell, and the only way for us to obtain the imports we wanted was to shift workers to the manufacturing sector, and to increase the value-added of exports. But devoting more of our productive capacity to making things that are to be consumed by foreigners isn't a path to prosperity, and workers' real buying power stagnated.
In 2002, commodity prices rose, and we were able to get the imports we wanted with fewer productive resources allocated to the export sector. The expansion of 2002-2008 was characterised by a shift out of export-oriented manufacturing, and these workers were able to produce more for domestic consumption. Exports stagnated, but real incomes increased.
In this context, the idea that Canada's expansion depends on exports seems rather odd. I don't see how paying more for imports is going to make us better off.
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