The Comprehensive Economic and Trade Agreement between Canada and the European Union was supposed to open the door for Canadian businesses to one of the most lucrative markets in the world. So why aren’t our exporters running through it?
National Bank of Canada published a research note this week showing that in the first 12 months of CETA (it went into force on Sept. 21, 2017), Canadian goods exports to the EU rose a decidedly modest 3.8 per cent compared with the 12 months before the deal took effect.
That’s less, on average, than exports to the EU grew in the prior four years, without a landmark trade deal. It’s also less than Canada’s exports to the rest of the world over the same post-CETA period, which grew more than 5 per cent.
“That’s disappointing, to say the least,” National Bank economist Krishen Rangasamy wrote.
But CETA seems to be working much better for European exporters. The report noted that exports of EU goods into Canada jumped nearly 13 per cent in the first 12 months under the pact. The net effect has been a significant widening of Canada’s trade deficit with the EU.
And we can’t blame the gap on a divergence of economic performance. Mr. Rangasamy noted that real gross domestic product in Canada and the EU grew at about the same pace over that period.
It should be noted that the benefits of a trade agreement shouldn’t be measured in the win-loss columns of surpluses and deficits; if we’ve learned nothing else from bashing our foreheads against U.S. President Donald Trump’s trade rhetoric over the past two years, we have at least learned that. If freer trade lowers costs and improves efficiencies – and it invariably does – then it benefits both economies regardless of the resulting trade balance.
Nevertheless, for an export-driven economy such as Canada’s, the results suggest we’re failing to capitalize on an opportunity. Especially when the Canadian government that signed the deal has put on a push to diversify our exports. (Remember that as of July, the trade portfolio in the federal cabinet now goes by the title of Minister of International Trade Diversification.)
One possible explanation that Mr. Rangasamy offers is that Canadian companies are “still learning how to cater to a new market.” While it sounds simplistic, there might be something to that. Frankly, despite being such an export-heavy country, Canadian businesses have demonstrated a certain risk aversion to embracing new trade opportunities – especially the small and medium-sized enterprises (SMEs) that might have the most room to grow by opening new markets.
Research by Export Development Canada, the federal export finance agency, shows that about two-thirds of exporters look to the U.S. market as their first choice to sell their goods abroad. And our exporters are overwhelmingly the country’s biggest companies: The EDC finds that companies with more than 500 employees – representing less than 3 per cent of all Canadian corporations – are responsible for more than 60 per cent of Canada’s exports. Canadian government data show that only 12 per cent of Canada’s SMEs export at all.
Those numbers suggest that on the trade-diversification front, there’s more to it than opening new markets for Canadian goods. Canada also needs to diversify its base of exporters, and to give SMEs better comfort and incentives to embrace trade as a growth path of choice.
To that end, Prime Minister Justin Trudeau’s cabinet shuffle last July put Mary Ng in charge of a dual mandate of Small Business and Trade Promotion – with a key responsibility to find ways to help the country’s SMEs expand their markets internationally, especially in countries where Canada has secured preferential access under trade agreements. There are also rumblings that the government’s fall budget update, set for Nov. 21, will commit additional funding to not only lead small businesses to Canada’s trade-deal waters, but get them to drink.
But Mr. Rangasamy suggests there could be “something worse” behind the post-CETA performance: It may be further evidence of Canada’s nagging competitiveness problems in foreign markets.
A recent report by the World Economic Forum ranked Canada 12th in global competitiveness, down two notches from 2017. Notably, there are six EU countries that rank ahead of Canada.
In particular, the WEF report says Canada considerably underspends on research and development compared with the countries ranked ahead of it, and is a notoriously slow adopter of information and communications technologies.
Ottawa is all too aware of the competitiveness issue. Indeed, it has pledged new pro-competitive measures in the fall update later this month, something businesses have been pushing hard for ever since the Trump administration slashed U.S. corporate taxes at the start of the year. But as Canada pursues diversification of its trade base away from its reliance on the U.S. market, its competitiveness efforts will have to take a much more global view than merely competing with U.S. tax rates. In that regard the first-year CETA numbers may be a timely wake-up call.