The Canadian economy appears to be on a long-term trend toward less dependence on the United States, according to a new study by TD Economics.
The study, released Wednesday, found that Canada’s economic reliance on the U.S. in its share of exports and GDP has dropped steadily over the last decade.
For example, exports to the U.S. directly contributed an annual average of 0.5 percentage points to nominal GDP growth over the last decade. That was well below an average annual contribution of 2.3 percentage points during the 1980s and 1990s.
TD Economics says a rebound in U.S. economic growth should boost Canadian exports south of the border over the next few years.
But over the long term, the bank said Canada’s economic prosperity will increasingly be driven by trade with other non-U.S. economies.
That will reinforce the trend in recent years, where Canadian economic power is shifting more and more from central Canada to the energy and resource-rich western provinces.
The export shift also likely means future job growth in the Canadian economy will come mainly from the energy, mining and other resource industries based in Western Canada and which export more of their output to China, Japan and other international markets.
The traditional auto and manufacturing sector based in Ontario and Quebec that had driven Canadian exports for decades has already cut tens of thousands of jobs in recent years and is expected to grow much more slowly.
In its report, TD Economics projects that by 2020 the direct contribution of the U.S. to Canadian exports will have slipped to under 67 per cent from a peak of 84 per cent in 2002.
“At the same time, the direct contribution of U.S. exports to Canadian GDP will stabilize at 20 per cent, almost half of its share 10 years ago,” the bank said.
On the other hand, while exports to the U.S. are down 14 per cent from the peak in 2002, Canadian exports to China have more than doubled and exports to Europe are up 83 per cent.
Factors driving Canada’s shrinking reliance on U.S. exports include a one-third appreciation in the loonie against the U.S. dollar.
A high loonie – it gained more than half a cent to $1.0026 (U.S.) on Wednesday – makes Canadian exports to the United States more expensive and harder to sell.
“In combination with rising unit labour costs, [that]has eroded the competitiveness of Canadian-made goods in the U.S. market,” TD said.
As well, the U.S. market has become more competitive with emerging markets a growing source of U.S. imports.
“For instance, in 2003, China overtook Canada’s position as the most important source of U.S. imports.”
Meanwhile, the boom in exports in 1990s following the signing of the North American Free Trade Agreement has seen diminishing returns in the past decade, especially since a “thickening in the Canada-U.S. border” following the Sept. 11 terrorist attacks on U.S. soil.
The report also noted that the 2008-09 recession took a large bite out of U.S. demand for Canadian imports, particularly for automotive and machinery and equipment products.
And the study’s authors also point out that strong gains in commodity price have been a major driver of GDP growth over the past decade.
“In addition, low interest rates and a boom in Canadian government spending have spurred outsized growth in domestic spending, thus making U.S. exports look smaller in the overall count.”
TD Economics said any short-term bounce-back in exports to the U.S. market will be counteracted by those structural changes, especially the high Canadian dollar and increased competitiveness in the U.S. marketplace.
“With respect to trade diversification away from the U.S., the ball has already been set in motion,” it added.
Since 2009, Canadian officials have signed or brought into force six free trade agreements and are currently negotiating 14 free trade agreements, including one with the European Union expected to be concluded some time this year.
A joint study by the European Commission and the Government of Canada estimated that once in force, such a free trade deal could increase Canadian exports to Europe by an additional 20 per cent by 2014.